Exhibit 99.1
Item 1. BUSINESS
Cytec is a global specialty chemicals and specialty materials company that
focuses on value-added products. The Company serves major markets for aerospace,
automotive and industrial coatings, chemical intermediates, mining, plastics and
water treatment. The Company manufactures the vast majority of its products and
sells its products worldwide. The Company had net sales of $1,721.3 million and
earnings from operations of $167.7 million in 2004.
The Company reports with respect to four segments: Cytec Performance
Specialties, Cytec Surface Specialties, Cytec Engineered Materials and Building
Block Chemicals. Cytec Performance Specialties principally include water
treatment chemicals, mining chemicals, phosphine and phosphorous specialties,
polymer additives and specialty additives. Cytec Surface Specialties principally
include coatings, amino resins and performance chemicals. Cytec Engineered
Materials principally include advanced composites and film adhesives. Building
Block Chemicals principally include acrylonitrile, hydrocyanic acid, acrylamide,
sulfuric acid and melamine. The Cytec Performance Specialties and Cytec Surface
Specialties segments are collectively referred to as Specialty Chemicals. The
Company characterizes its product lines as platform product lines and value
product lines. Platform product lines are those product lines the Company
believes have a competitive advantage to grow organically and by extension
through strategic acquisitions. The Company expects these product lines to have
sales growth over a business cycle considerably in excess of growth in gross
domestic product. The Company also expects its platform product lines will need
investment in research and development and possibly in capital to increase
global capacity to support sales growth. Value product lines are those product
lines which are expected to build sales and profit growth through greater focus
on manufacturing productivity. Value product lines are expected to provide
significant free cash flow and to increase their economic value with a greater
focus on asset management. The Company's platform product lines are water
treatment chemicals, mining chemicals, phosphine and phosphorous specialties,
coatings, performance chemicals and specialty additives, and specialty
materials. The Company's value product lines are polymer additives and building
block chemicals.
The Company's management regularly reviews the product line portfolio of
the Company in terms of strategic fit and financial performance and may from
time-to-time dispose of or withdraw certain product lines and/or acquire
additional product lines or technologies. Additionally, regular reviews are
performed of the cost effectiveness and profitability of plant sites or
individual facilities within such sites. In management's opinion, the financial
impact of a disposal or withdrawal of certain product lines together with the
impact on plant sites will not have a material adverse effect on the financial
position of the Company but could be material to the results of operations of
the Company in any one accounting period.
On October 1, 2004, the Company announced that it had signed a definitive
agreement to purchase the Surface Specialties business ("Surface Specialties")
of UCB Group ("UCB"), a Belgium biopharmaceutical and specialty chemical
company, for cash and stock, valued at that time, of 1.5 billion euros. In early
February 2005, the Company reached agreement with UCB to modify the terms of the
purchase agreement. Assuming the dollar to euro exchange rate is 1.3 to 1 and
that Cytec common stock is $51 per share, the transaction would be valued at
$1.841 billion of which 1.140 billion euros ($1.482 billion) will be paid in
cash and the balance will be paid in 5,772,857 shares of Cytec common stock
($294 million). In addition, there is contingent consideration up to a maximum
of 50 million euros ($65 million), of which 20 million euros ($26 million) will
be paid up front with the balance payable in 2006. The contingent consideration
will be earned on a pro-rata basis pending the achievement of certain operating
results by Surface Specialties in 2005. UCB also agreed to reimburse Cytec 15
million euros ($19.5 million) for transaction related costs. The acquisition is
subject to customary closing conditions including the approval of the U.S.
Federal Trade Commission.
Upon closing, UCB would own approximately 12% of the outstanding shares of
Cytec and will enter into a stockholders agreement that will provide for UCB to
reduce its stake within five years and that will contain other customary terms
and conditions. The cash portion of the transaction will be financed utilizing
the credit facilities described in Item 7 under "Liquidity and Financial
Condition."
Surface Specialties also has a significant amino resins business. The
Company has agreed with the European Union Commission, and expects to reach a
similar agreement with the U.S. Federal Trade Commission, that it will divest
UCB's amino resins business after it purchases Surface Specialties and that
prior to the divestment, Surface Specialties amino resins business will be held
separately and will report to an independent trustee. After the transaction with
UCB is consummated, for the duration that the amino resins business is owned by
Cytec, its results of operations will be classified as results from discontinued
operations on Cytec's consolidated statements of income.
The acquisition complements Cytec's existing product lines by significantly
increasing Cytec's product offering to the coatings industries including the
general industrial, automotive, architectural, plastic, graphic arts and wood
sectors. (For a further discussion of this event refer to Item 7 herein as well
as Note 2 of the Notes to Consolidated Financial Statements.)
1
Cytec was incorporated as an independent public company in December 1993.
Segment Information
Revenues from external customers, earnings from operations and total assets
for each of the Company's reportable segments can be found in Note 16 of the
Notes to Consolidated Financial Statements.
Cytec Performance Specialties Segment
Set forth below are the Company's primary product lines and major products
in this segment and their principal applications.
- ----------------------------- --------------------------------- ------------------------------
PRODUCT LINE MAJOR PRODUCTS PRINCIPAL APPLICATIONS
- ----------------------------- --------------------------------- ------------------------------
Water treatment chemicals Flocculants, coagulants, filter Water and wastewater
aids, drilling fluids and treatment, raw water
production chemicals, scale clarification, process water
inhibitors, friction reducers treatment, oil field
and mobility control polymers drilling, production,
recovery, refining, sugar
processing and municipal
waste
- ----------------------------- --------------------------------- ------------------------------
Mining chemicals Promoters, collectors, solvent Mineral separation and
extractants, flocculants, processing for copper,
frothers, filter and dewatering alumina and certain other
aids, antiscalants, dispersants, minerals
depressants, defoamers and
reagents
- ----------------------------- --------------------------------- ------------------------------
Phosphine and phosphorous Solvent extractants, flame Mineral processing;
specialties retardants, catalyst ligands, pharmaceutical, chemical and
high purity phosphine gas and electronic manufacturing;
biocides and fumigants
- ----------------------------- --------------------------------- ------------------------------
Polymer additives Ultraviolet light stabilizers A broad range of plastics,
and absorbers, high performance coatings, and fibers for
antioxidants and antistatic agricultural films,
agents automotive parts,
architectural lighting,
fiberglass, housewares,
packaging, outdoor
furniture, sporting goods,
toys and apparel
- ----------------------------- --------------------------------- ------------------------------
Specialty additives Surfactants, specialty monomers Emulsion polymers for
and acrylic stabilizers textiles, non-wovens and
adhesives and super
absorbent products
- ----------------------------- --------------------------------- ------------------------------
Many of the Company's products in this segment are manufactured using
acrylamide that is manufactured by the Company's Building Block Chemicals
segment. For further discussion of raw materials, refer to "Customers and
Suppliers," contained herein.
Water Treatment Chemicals
The Company's water treatment chemicals product line consists primarily of
the manufacture and sale of products for use in applications such as treatment
of industrial waste streams and industrial influent water supplies to remove
suspended solids, sewage conditioners for municipal wastewater treatment and as
drilling mud conditioners for oil service companies. Increased demand for clean
water, environmental regulations and regional and global economic development
have increased demand for the Company's water treatment chemicals. Cytec also
produces paper chemicals under a long-term manufacturing supply agreement that
expires in October, 2005. The Company has negotiated another supply agreement
with the same customer scheduled to commence in November, 2005 and expire in
October, 2008.
Competition is generally intense in wastewater treatment applications,
particularly for those applications where technical service is not an important
factor. Cytec markets its water treatment chemicals through a specialized sales
staff with an emphasis on sales to global full-service water treatment
companies.
2
Mining Chemicals
The Company's mining chemicals product line is primarily used in
applications to separate minerals from ores. The Company has leading positions
in the copper processing industry, particularly in the flotation and in
extraction of copper. The Company also has a leading position in the alumina
processing industry, where its patented HxPams are particularly effective at the
flocculation of "red mud". The Company also sells phosphine chemicals specialty
reagents which have leading positions in cobalt nickel separation and copper
sulfide recovery applications. In 2003 the Company broadened its mining
chemicals product line by acquiring from Avecia, its metal extractant product
("MEP") line. The MEP product line has a leading position for extractants in the
processing of copper oxide ores. The Company has recently approved a capital
project to increase its MEP capacity by 50%. Demand for mining chemicals is
cyclical and varies with industry conditions such as global demand, inventory
levels and mineral prices for the particular minerals with respect to which the
Company's products have processing applications. The Company strives to develop
new technologies as well as new formulations tailored for specific applications.
The Company's mining chemicals product lines are marketed primarily through a
specialized sales and technical services staff. Cytec has expanded its sales and
technical service presence in South America, South Africa, Asia and Australia,
the growth markets for the Company's mineral processing chemicals.
Phosphine and Phosphorous Specialties
The Company's phosphine and phosphorous specialties are utilized for a
variety of applications. The Company is the largest supplier of ultra-high
purity phosphine gas, used in semiconductor manufacturing and light emitting
diode applications, and has significant positions in various phosphine
derivative products including phosphonium salts used in pharmaceutical catalysts
and biocides. In 2003, the Company acquired from Avecia its organo phosphorus
product line as part of its Intermediates and Stabilizers ("I&S") product line.
The compounds are used primarily as intermediates and catalyst ligands for
organic and chemical synthesis in the pharmaceutical and chemical industries.
Sales of certain phosphine products are dependent upon obtaining and maintaining
necessary registrations and approvals from applicable regulatory agencies and
the Company is seeking additional product registrations. The Company also seeks
to broaden its product line through development of additional proprietary
technologies for pharmaceuticals, specialty chemicals catalysts and reactive
intermediate applications.
Polymer Additives
The Company is a significant global supplier to the plastics industry of
specialty additives which protect plastics from the ultraviolet radiation of
sunlight and from oxidation. Typical end use applications of the Company's
products include a wide variety of polyolefins that are used in agricultural
films, toys, lawn furniture and automotive applications, fibers for carpets,
spandex applications, engineered plastics and automotive coatings. The Company
seeks to enhance its position with new products based on proprietary chemistries
and solutions-based technical support.
The Company markets polymer additives through a dedicated sales and
technical service staff. Sales are typically made directly to large customers
and through distributors to smaller customers.
Specialty Additives
The Company is a leading global supplier of acrylamide based specialty
monomers and sulfosuccinate surfactants. These products are used in emulsion
polymers, paints, paper coatings, printing inks, and other diverse customer
applications.
The Company also manufactures and markets stabilizers for acrylic and
methacrylic acids and certain thermoplastic polymers.
Cytec Surface Specialties Segment
Set forth below are the Company's primary product lines and major products
in this segment and their principal applications.
- ----------------------------------- --------------------------------- ------------------------------------------------
Product Line Major Products Principal Applications
- ----------------------------------- --------------------------------- ------------------------------------------------
Coatings Chemicals Amino resins, additives, Industrial coatings and paints for appliances,
urethanes and carbamates automobiles, containers, metal fixtures, metal
and wood furniture and heavy duty industrial
machinery
Performance chemicals Adhesion promoters, urethanes, Sealants, inks, electrical and electronic
carbamates, thermoplastics, products, wood bonding and laminating, tires
formulated polyurethanes and and rubber products, flexible packaging, and
epoxies plastics
- ----------------------------------- --------------------------------- ------------------------------------------------
3
Many of the Company's products in this segment are manufactured using
melamine and acrylamide that are both manufactured by the Company's building
block chemicals segment. For further discussion of raw materials, refer to
"Customers and Suppliers," contained herein.
Coatings Chemicals
The Company believes that it is the largest global supplier of amino
crosslinking resins ("Resins"), which the Company markets primarily for
industrial coatings applications. The Company sells Resins worldwide to
manufacturers producing coatings for automotive, marine, wood and metal
finishings, and appliances, containers, coils and general industrial maintenance
coatings. In 2003, the Company acquired 100% of the coating resins product line
formerly operated by its Mitsui Cytec joint venture.
The Company markets coating chemicals through a specialized sales and
technical service staff. Sales are typically made directly to large customers
and through distributors to smaller customers.
Performance Chemicals
The Company's performance chemicals are sold into varied end use
applications. The largest product group is a line of adhesion promoters which
are used globally in the rubber industry, the major application being the
manufacture of tires.
The Company manufactures and markets urethane chemicals and formulated
polyurethane and epoxy systems. The Company's urethane chemicals are sold
primarily for use in high performance coating applications, inks and adhesives
and formulated polyurethane systems are sold primarily for use as potting
compounds in electrical applications.
The Company markets its performance chemicals through several specialized
sales and technical service staffs. Sales are typically made directly to large
customers and through distributors to smaller customers. The Company has
typically achieved growth in its performance chemicals sales by finding new
applications for its existing products.
Cytec Engineered Materials Segment
The Cytec Engineered Materials segment principally manufactures and sells
aerospace materials that are used mainly in commercial and military aviation,
satellite and launch vehicles, aircraft brakes and certain high performance
applications such as Formula 1 racing cars and luxury sports cars.
Cytec Engineered Materials
The Company is the major global supplier of aerospace structural film
adhesives and a major supplier of aerospace advanced composite materials.
Advanced composites are exceptionally strong and lightweight materials
manufactured by impregnating fabrics and tapes made from high performance fibers
(such as carbon) with epoxy, bismaleimide, phenolic, polyimide and other resins
formulated or purchased by the Company.
The primary applications for both aerospace adhesives and advanced
composites are commercial airliners, regional and business jets, military
aircraft, satellites and launch vehicles, high performance automotive and
specialty applications. Sales are dependent to a large degree on the commercial
and military aircraft build rate and the number of applications and aircraft
programs for which the Company is a qualified supplier. Every major commercial
aircraft program in the Western world has qualified and uses certain of the
Company's products. The Company is a major supplier to such military programs as
the F-35 Joint Strike Fighter, the F/A-22 and F/A-18 combat aircraft and the
C-17 transport aircraft. The Company has a number of long term agreements,
expiring over various periods, to supply aerospace customers with their
requirements, subject to various exceptions, of various specialty materials at
prices that are generally fixed by year.
Advanced composites generally account for a higher percentage of the
structural weight on military aircraft than on commercial aircraft. They also
account for a higher percentage of the structural weight on newer design
commercial aircraft than older design commercial aircraft as technology
progresses and manufacturers design planes to achieve greater fuel efficiency.
Advanced composites made from carbon fibers and epoxy or bismaleimide resins are
primarily used for structural aircraft applications such as wing, tail and
rudder components, engine housings, and fuselage components while advanced
composites made from fiberglass or aramid materials and phenolic resins are
primarily used for secondary structure applications such as fairings and
interior aircraft applications such as sidewall, ceiling and floor panels and
storage and cargo bins. In addition, the Company's ablatives are used in
manufacturing rocket nozzles and the Company's carbon/carbon products are used
in manufacturing aircraft and other high performance brakes. The Company expects
the demand for advanced composites to continue to increase and completed the
expansion of its production facility in Oestringen, Germany in 2004 to meet this
increased demand.
4
The Company's aerospace adhesives and advanced composites also have various
applications in industrial, high performance automotive and selected
recreational products. The Company is seeking to leverage its engineered
materials portfolio with customers in these and other new markets.
The Company purchases from third parties all of the aramid and glass fibers
and much of the carbon fibers and base resins used in the manufacture of
composites. Other carbon fibers are sourced directly from Cytec Carbon Fibers as
discussed below. Refer to "Customers and Suppliers."
The Company markets aerospace materials through a dedicated sales and
technical service staff typically direct to customers.
Cytec Carbon Fibers
The Company manufactures and sells various high performance grades of both
PAN (polyacrylonitrile) type and pitch type carbon fibers. Carbon fibers are
mainly used as a reinforcement material for advanced composites used in the
aerospace and certain other industries and have many advantageous
characteristics such as light weight, tensile strength and heat resistance.
Over 50% of the Company's carbon fiber production is utilized internally in
the production of certain of the Company's advanced composites. The remainder is
sold to third parties through a direct sales force.
Building Block Chemicals Segment
Building Block Chemicals are manufactured primarily at the Company's
world-scale, highly integrated Fortier facility. The Fortier facility is located
on the bank of the Mississippi River near New Orleans, Louisiana and has access
to all major forms of transportation and supplies of raw materials. The Company
attempts to operate most of its plants at capacity subject to market conditions
and raw material availability.
Acrylonitrile and Hydrocyanic Acid
The Company anticipates that over the near term it will use internally
approximately 30% of its current acrylonitrile annual production capacity of 475
million pounds to produce acrylamide and that up to approximately 40% will be
sold to a single international trading company under a long-term agreement.
Currently, about half of the volume sold to the trading company is sold under a
cost based supply contract and the rest is sold under a market price based
distribution agreement. Effective May 1, 2005, the entire amount will be sold
under the market price based distribution agreement. The profitability of
producing acrylonitrile is influenced by supply and demand, by the cost of
propylene and ammonia, which are the largest components of the cost of producing
acrylonitrile, and by manufacturing efficiency (i.e., yield and co-product
recovery). Hydrocyanic acid is produced as a co-product of the acrylonitrile
process. Substantially all of the hydrocyanic acid produced by the Company is
sold to CYRO (Refer to "Associated Company," below), as a raw material for
methyl methacrylate ("MMA") under a long-term contract with an initial
expiration date in 2011.
Other Building Block Chemicals
The Company also manufactures and sells acrylamide, sulfuric acid and
melamine. The Company anticipates that over the near term it will use internally
approximately 40% of its acrylamide annual production capacity of approximately
200 million pounds for the production of certain products for the Company's
water treating chemicals, mining chemicals and performance chemicals product
lines. The remainder of the Company's production is sold to third parties. The
Company manufactures acrylamide at its Fortier facility and at its Botlek
facility in the Netherlands.
The Company sells sulfuric acid to third parties and also toll converts
substantially all of CYRO's spent sulfuric acid arising from the manufacture of
MMA under a long-term service contract with an initial expiration date in 2011.
American Melamine Industries ("AMEL"), a 50% owned manufacturing joint
venture with a subsidiary of DSM N.V., operates a melamine manufacturing plant
with annual production capacity of approximately 160 million pounds at the
Fortier facility. The joint venture may be terminated effective August 1, 2007
by either party upon two year's prior written notice. DSM, which is a leading
manufacturer of melamine, makes its melamine expertise available to AMEL under a
license agreement. The Company anticipates that over the near term it will use
internally up to approximately 80% of its 50% share of AMEL's annual melamine
production, primarily for the production of Resins. The remainder of the
Company's share of production is sold to third parties.
Prices of building block chemicals are sensitive to the stages of economic
cycles, raw material cost and availability, energy prices and currency rates, as
well as to periods of insufficient and excess capacity. The production of
building block chemicals is generally capital intensive, which may cause strong
downward pressure on prices in poor market environments as producers tend to
operate their plants at capacity even in poor market environments. The Company
sells building block chemicals to third parties through a direct sales force and
distributors.
5
Associated Company
CYRO Industries, a 50% owned joint venture, manufactures and sells acrylic
sheet and molding compound products, primarily under the ACRYLITE(R) trademark,
and MMA. CYRO operates primarily in North America and manufactures its acrylic
products at four locations in the U. S. The Company's partner in CYRO, an
indirect subsidiary of Degussa A.G., has an affiliate, Rohm GmbH and Co. KG.,
that manufactures and sells acrylic sheet and molding compounds products and MMA
primarily in Europe and makes its technological expertise available to CYRO.
CYRO uses much of the MMA it manufactures as a raw material in the
manufacture of acrylic sheet and molding compounds and it sells the remainder to
third parties. CYRO's world-scale MMA manufacturing facility is an integrated
part of the Company's Fortier facility, consuming substantially all the
hydrocyanic acid produced by the Company in connection with the manufacture of
acrylonitrile. CYRO's annual MMA production capacity is 290 million pounds.
For additional information refer to Note 5 of the Notes to Consolidated
Financial Statements.
Competition
The Company operates in a highly competitive marketplace. It competes
against a number of other companies in each of its product lines, although none
of such companies competes with the Company in all of its product lines. The
Company's competitors are both larger and smaller than the Company in terms of
resources and market shares. Competition is primarily based on product
performance, reputation for quality, price and customer service and support. The
degree and nature of competition depends on the type of product involved.
In general, the Company competes by maintaining a broad range of products,
focusing its resources on products in which it has a competitive advantage and
fostering its reputation for quality products, competitive prices and excellent
technical service and customer support. Through research and development, the
Company seeks to increase sales and margins by introducing value-added products
and products based on proprietary technologies.
Customers and Suppliers
A discussion of various long-term customer supply agreements is disclosed
in Note 10 of the Notes to Consolidated Financial Statements.
A number of the Company's customers operate in cyclical industries such as
the aerospace, automotive, mining and paper industries. As a result, demand for
the Company's products from customers in such industries is also cyclical. In
addition, the profitability of sales of certain of the Company's building block
chemicals varies due to the cyclicality typically experienced with respect to
the amount of industry-wide capacity dedicated to producing such chemicals and
the amount of end user demand.
With respect to suppliers, the Company's vertical integration (i.e., its
manufacture of intermediates used to manufacture certain water treatment
chemicals, mining chemicals, coatings and specialty additives and performance
chemicals and its manufacture of carbon fibers for advanced composites) helps
protect it from being reliant on other companies for many significant
intermediates. The significant raw materials required to manufacture the
Company's building block chemicals are natural gas, propylene, ammonia and
sulfur which are typically available although the Company has experienced tight
markets for certain raw materials from time to time. Natural gas is an important
indirect raw material for many of the Company's products, including Resins.
Because natural gas is not easily transported, the price may vary widely between
geographic regions. The price of natural gas in the United States has been
volatile during the past few years and is significantly above the price in many
other parts of the world. The Company has not had any problems obtaining the
natural gas that it needs. However, many of the Company's products compete with
similar products made with less expensive natural gas available elsewhere and
the Company may not be able to recover any or all of the increased cost of gas
in manufacturing its products. The Fortier facility is served principally by a
single propylene pipeline owned by a supplier although other suppliers can
utilize the pipeline for a transportation fee. In addition, the Company has made
arrangements to obtain propylene by rail.
Raw material cost changes year on year are an important factor in
profitability and prices of raw materials can increase or decrease based on
supply and demand and other market forces. The Company experienced some
difficulty procuring several key raw materials during 2004 in what was perceived
to be a tight market. Due to reduced propylene availability in the first quarter
of 2004, the Company's acrylonitrile plant did not operate at full capacity
impacting production and inventory levels. The Company expects that tight
markets for key raw materials will occur during 2005. The Company was recently
notified by its major supplier of propylene that as of February 1, 2005, it will
be placed on an 85% supply allocation of its requirements for up to six months
due to mechanical difficulties. Management does not expect this allocation,
should it occur for the term anticipated, to have a material impact on Company
operations in the first quarter of 2005. In the event that raw material supply
limiting conditions arise, the Company expects that prices of raw materials
could increase, potentially adversely affecting profit margins of the Company.
Additionally, such conditions, if protracted, could result in lower than
anticipated revenues.
6
The Company generally attempts to retain multiple sources for high volume
raw materials, other than its own building block chemicals, in order to minimize
its reliance on any one supplier. The Company sources its requirements of
cationic monomers from a single supplier under a long-term agreement. Cationic
monomers are important raw materials in the water treatment chemicals and mining
chemicals product lines. The Company is dependent on a limited number of
suppliers for carbon fibers that are used in many of the Company's advanced
composite products. While the risk of future carbon fiber supply limitations is
reduced since the Company manufactures some of its own carbon fibers, currently
carbon fiber is in short supply and until market capacity increases, shortages
are possible. There can be no assurance that the risk of encountering supply
limitations could be entirely eliminated.
International
The Company operates on a global basis with manufacturing plants located in
ten countries. Export sales to unaffiliated customers from the United States
were $234.4 million in 2004, $186.6 million in 2003 and $164.7 million in 2002
or approximately 14%, 13% and 12% of net sales in such years, respectively.
The Company markets its products internationally through Company sales
forces, distributors and agents. International sales were approximately 53% in
2004, 51% in 2003 and 49% in 2002, of net sales to external customers.
The Company's identifiable assets located outside of the United States, by
geographical region, at year end 2004 and 2003 are set forth in Note 16 of the
Notes to Consolidated Financial Statements and are incorporated by reference
herein.
International operations are subject to various risks which may not be
present in U.S. operations including political instability, the possibility of
expropriation, restrictions on royalties, dividends and remittances,
instabilities of currencies, requirements for governmental approvals for new
ventures and local participation in operations such as local equity ownership
and workers' councils. The Company does not currently believe that it is likely
to suffer a material adverse effect on its results of operations in connection
with its existing international operations.
Research and Process Development
During 2004, 2003 and 2002, the Company incurred $40.0 million, $35.2
million and $33.7 million, respectively, of research and process development
expense. During 2004, the Company substantially completed the multi-year
renovation and upgrade of its main Specialty Chemicals research facility located
in Stamford, Connecticut at a total cost incurred through December 31, 2004 of
approximately $54.2 million.
Trademarks and Patents
The Company has approximately 1,750 United States and international patents
and also has trademark applications and registrations for approximately 150
product names. The Company believes the loss of patent or trademark protection
on any one product or process would not have a material adverse effect on the
Company. While the existence of a patent is prima facie evidence of its
validity, the Company cannot assure that any of the Company's patents will not
be challenged, and it cannot predict the outcome of any challenge.
Employees
The Company employs approximately 4,500 employees of which approximately
2,200 are covered by union contracts. The Company believes that its relations
with both employees and the related union leaderships are generally good.
Operating Risks
The Company's revenues are largely dependent on the continued operation of
its various manufacturing facilities. The operation of chemical manufacturing
plants involves many risks, including the breakdown, failure or substandard
performance of equipment, operating errors, natural disasters, and the need to
comply with directives of, and maintain all necessary permits from, government
agencies. In addition, the Company's operations can be adversely affected by raw
material or energy supply disruptions, labor force shortages or work stoppages
and events impeding or increasing the cost of transporting the Company's raw
materials and finished products. The occurrence of material operational
problems, including but not limited to the above events, may have a material
adverse effect on the productivity and profitability of a particular
manufacturing facility, or with respect to certain facilities, the Company as a
whole, during the period of such operational difficulties.
7
The Company's operations are also subject to various hazards incident to
the production of industrial chemicals, including the use, handling, processing,
storage and transportation of certain hazardous materials. Under certain
circumstances, these hazards could cause personal injury and loss of life,
severe damage to and destruction of property and equipment, environmental damage
and suspension of operations. Claims arising from any future catastrophic
occurrence at one of the Company's locations may result in the Company being
named as a defendant in lawsuits asserting potentially large claims. The Company
utilizes third party insurance to cover portions of certain of these risks to
the extent that coverage is available and can be obtained on terms the Company
believes are economically justifiable.
Environmental Matters
The Company is subject to various foreign and domestic laws and regulations
which impose stringent requirements for the control and abatement of pollutants
and contaminants and the manufacture, transportation, storage, handling and
disposal of hazardous substances, hazardous wastes, pollutants and contaminants.
In particular, under various governmental laws in the U.S., a current or
previous owner or operator of a facility may be liable for the removal or
remediation of hazardous materials at the facility and nearby areas. Such laws
typically impose liability without regard to whether the owner or operator knew
of, or was responsible for, the presence of such hazardous materials. In
addition, under various laws governing the generation, transportation,
treatment, storage or disposal of solid and hazardous wastes, owners and
operators of facilities may be liable for removal or remediation, or other
corrective action at areas where hazardous materials have been released. The
costs of removal, remediation or corrective action may be substantial, and the
presence of hazardous materials in the environment at any of the Company's
facilities, or the failure to abate such materials promptly or properly, may
adversely affect the Company's ability to operate such facilities. Certain of
these laws also impose liability for investigative, removal and remedial costs
on persons who dispose of or arrange for the disposal of hazardous substances at
facilities owned or operated by third parties. Liability for investigative,
removal and remedial costs under such laws is retroactive, strict, and joint and
several.
The Company is required to comply with laws that govern the emission of
pollutants into the ground, waters and the atmosphere and with laws that govern
the generation, transportation, treatment, storage, and disposal of solid and
hazardous wastes and laws that regulate the manufacture, processing, and
distribution of chemical substances and mixtures, as well as the disposition of
certain hazardous substances. In addition, certain laws govern the abatement,
removal, and disposal of asbestos-containing materials and the maintenance of
underground storage tanks and equipment which contains or is contaminated by
polychlorinated biphenyls. The costs of compliance with such laws and related
regulations may be substantial, and regulatory standards tend to evolve towards
more stringent requirements, which might, from time-to-time, make it uneconomic
or impossible to continue operating a facility. Non-compliance with such
requirements at any of the Company's facilities could result in substantial
civil penalties or the inability of the Company to operate all or part of the
facility.
Notes 1 and 10 of the Notes to Consolidated Financial Statements are
incorporated by reference herein.
8
Item 2. PROPERTIES
The Company operates manufacturing and research facilities in ten
countries. Capital spending for the years ended 2004, 2003 and 2002 was $89.3
million, $93.8 million, and $62.2 million, respectively. Capital expenditures in
2005 are expected to be in the range of $85.0 to $95.0 million not including any
capital expenditures relating to Surface Specialties after the anticipated
acquisition. Major projects in 2004 were the completion of the expansion at the
Company's Oestringen, Germany facility and the substantial completion of a
multi-year project to significantly upgrade and modernize its Specialty
Chemicals research facility in Stamford, Connecticut and infrastructure upgrades
at its Willow Island, West Virginia facility. In the fourth quarter of 2004, the
Company also started several incremental capacity expansion projects in its
Mining Chemicals, Phosphines and Polymer Additives product lines. The increase
in spending during 2003 from 2002 levels was due primarily to a modernization of
the Specialty Chemicals research facility, expanding capacity at its Oestringen,
Germany manufacturing facility, infrastructure upgrades at its Willow Island,
West Virginia manufacturing facility and capital expenditures at plants acquired
by the Company during 2003 in Shimonoseki, Japan and Mount Pleasant, Tennessee.
The Company's capital expenditures are intended to provide increased capacity,
to improve the efficiency of production units, to improve the quality of the
Company's products, to modernize or replace older facilities, or to install
equipment for protection of employees, neighboring communities and the
environment.
The Company's major facilities and the segments served by each such
facility are as follows:
- ---------------------------------------------------------------------------------------------------------------------
FACILITY PRINCIPAL SEGMENT
- ---------------------------------------------------------------------------------------------------------------------
Anaheim, California Cytec Engineered Materials
Atequiza, Mexico Cytec Performance Specialties; Cytec Surface Specialties
Antofogasta, Chile Cytec Performance Specialties
Avondale (Fortier), Louisiana Building Block Chemicals
Belmont (Willow Island), West Virginia Cytec Performance Specialties; Cytec Surface Specialties
Bogota, Colombia Cytec Performance Specialties; Cytec Surface Specialties
Botlek, the Netherlands Cytec Performance Specialties; Cytec Surface Specialties;
Building Block Chemicals
Bradford, U.K. Cytec Performance Specialties
Greenville, South Carolina Cytec Engineered Materials
Greenville, Texas Cytec Engineered Materials
Havre de Grace, Maryland Cytec Engineered Materials
Kalamazoo, Michigan Cytec Performance Specialties; Cytec Surface Specialties
Lillestrom, Norway Cytec Surface Specialties
Longview, Washington Cytec Performance Specialties
Mobile, Alabama Cytec Performance Specialties
Mount Pleasant, Tennessee Cytec Performance Specialties
Oestringen, Germany Cytec Engineered Materials
Olean, New York Cytec Surface Specialties
Orange, California Cytec Engineered Materials
Rock Hill, South Carolina Cytec Engineered Materials
Shimonoseki, Japan Cytec Surface Specialties
Stamford, Connecticut Cytec Performance Specialties; Cytec Surface Specialties
Wallingford, Connecticut Cytec Performance Specialties; Cytec Surface Specialties
Welland, Canada Cytec Performance Specialties
Winona, Minnesota Cytec Engineered Materials
Wrexham, U. K. Cytec Engineered Materials
The Company owns all of the foregoing facilities and their sites except for
the land at the Botlek, Lillestrom, Shimonoseki and land and buildings at Rock
Hill facilities which are leased under long-term leases. The Company leases its
corporate and Specialty Chemicals headquarters in West Paterson, New Jersey and
its Cytec Engineered Materials headquarters located in Tempe, Arizona.
9
Item 6. SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY
Note: The selected financial data below has been restated to show the
retroactive application of the change from the LIFO to the FIFO inventory
method which was adopted on January 1, 2005. Previously reported amounts
were restated for all periods presented. Refer to "Restatement for
Accounting Change," below. (Dollars in millions, except per share amounts)
2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Statements of income data:
Net sales $1,721.3 $1,471.8 $1,346.2 $1,387.1 $1,492.5
Earnings from operations $ 167.7 (1) $ 144.1 $ 118.4 (5) $ 111.2 (7) $ 178.3 (9)
Earnings before accounting change,
extraordinary item and premium paid to
redeem preferred stock $ 131.0 (2) $ 92.8 $ 78.7 (6) $ 64.6 (8) $ 178.6 (10)
Cumulative effect of accounting change, net of taxes - (13.6)(4) - - -
Extraordinary gain, net of taxes - - - 4.9 -
Premium paid to redeem preferred stock (9.9)(3) - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Net earnings available to common stockholders $ 121.1 $ 79.2 $ 78.7 $ 69.5 $ 178.6
- ---------------------------------------------------------------------------------------------------------------------------------
Basic net earnings per common share :
Net earnings available to common
stockholders before accounting change $ 3.06 $ 2.38 $ 1.99 $1.61 $ 4.36
and extraordinary gain
Cumulative effect of accounting change, net of taxes - (0.35) - - -
Extraordinary gain, net of taxes - - - 0.12 -
- ---------------------------------------------------------------------------------------------------------------------------------
Net earnings available to common stockholders $3.06 $ 2.03 $ 1.99 $1.73 $ 4.36
- ---------------------------------------------------------------------------------------------------------------------------------
Diluted net earnings per common share:
Net earnings available to common
stockholders before accounting change $2.96 $ 2.31 $ 1.94 $1.55 $ 4.18
and extraordinary gain
Cumulative effect of accounting change, net of taxes - (0.34) - - -
Extraordinary gain, net of taxes - - - $0.12 -
- ---------------------------------------------------------------------------------------------------------------------------------
Net earnings available to common stockholders $2.96 $ 1.97 $ 1.94 $1.67 $ 4.18
- ---------------------------------------------------------------------------------------------------------------------------------
Cash dividends declared and paid per common share: $0.40 - - - -
Balance sheet data:
Total assets $2,251.6 $2,046.4 $1,785.2 $1,669.8 $ 1,742.6
Long-term debt $ 300.1 $ 416.2 $ 216.0 $ 314.7 $ 313.4
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Includes a pre-tax charge of $8.0 for various litigation matters, including
$7.0 to settle a federal class action lawsuit alleging antitrust violations
relating to carbon fiber.
(2) In addition to the item in Note (1) above, includes an after-tax charge of
$4.8 relating to the settlement of several environmental and toxic tort
lawsuits, an after-tax charge of $1.6 relating to the settlement of disputed
matters with the former holder of the Company's Series C Preferred Stock, a tax
credit of $2.4 resulting from the favorable outcome of a recently completed
international tax audit and an after-tax gain of $17.1 resulting from derivative
transactions related to the pending acquisition of Surface Specialties.
(3) Represents a charge to net earnings available to common stockholders
resulting from the redemption of the Company's Series C Preferred Stock.
(4) Represents the cumulative effect of adopting Statement of Financial
Accounting Standards ("SFAS") No. 143. Expenses resulting from SFAS No. 143
included in Earnings from Operations were $1.8 in 2003. Had this accounting
policy been in effect in prior years, additional expenses of $1.7 in 2002, $1.6
in 2001 and $1.5 in 2000 would have been recognized in the determination of
earnings from operations.
(5) Includes net restructuring charges of $13.7 and a charge of $1.7 for costs
associated with a tax refund related to the prior years' research and
development tax credit.
(6) In addition to the items in Note (5) above, includes restructuring charges
of $0.4 included in equity in earnings of associated companies, $2.0 of interest
income related to the research and development tax credit, and a $6.0 reduction
in income tax expense related to a refund associated with prior years' research
and development tax credits.
(7) Includes a restructuring charge of $5.4 and $9.7 of goodwill amortization
that is no longer amortized under SFAS No. 142, "Goodwill and Other Intangible
Assets."
(8) In addition to the items in note (7) above, includes a restructuring charge
of $2.3 included in earnings of associated companies.
(9) Includes a restructuring charge of $10.1, a charge of $1.4 for receivables
which were deemed uncollectible and due the Company from its former ammonia
joint venture and $9.4 of goodwill amortization that is no longer amortized
under SFAS No. 142.
(10) In addition to the items in note (9) above, includes on a pre-tax basis: a
gain of $88.3 from the divestiture of the paper chemicals product line; a gain
of $13.3, discounted and net of expenses, from an environmental remediation
insurance settlement; a gain of $7.1 from the sale of real estate at a former
plant site; and a charge of $4.8 for the write-down of receivables from the AC
Molding Compounds joint venture.
10
Restatement for Accounting Change: Effective January 1, 2005, the Company
changed its inventory costing method for U.S. inventories from the last-in,
first-out ("LIFO") method to the first-in, first-out ("FIFO") method. Management
of the Company believes that the FIFO method is preferable to LIFO because FIFO
inventory values presented in the Company's consolidated balance sheet will more
accurately reflect the current value of inventory and the change to FIFO for
U.S. inventories results in the Company using a uniform method of inventory
valuation globally. Prior to the retroactive restatement for the change in
inventory costing method, operations using the LIFO cost method comprised almost
60% of the Company's inventories as of December 31, 2004. The effect of the
accounting change on net earnings and net earnings per common share as
previously reported for 2004 and prior years is as follows:
2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings available to common stockholders as
previously reported $ 116.2 $ 77.4 $ 79.3 $ 71.1 $ 177.6
Adjustment for effect of the change from LIFO to FIFO
applied retroactively, net of taxes 4.9 1.8 (0.6) (1.6) 1.0
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings available to common stockholders as
adjusted $ 121.1 $ 79.2 $ 78.7 $ 69.5 $ 178.6
============================================================================================================================
Basic net earnings per common share :
Net earnings available to common stockholders as
previously reported $ 2.94 $ 1.99 $ 2.01 $ 1.77 $ 4.34
Adjustment for effect of the change from LIFO to FIFO
applied retroactively, net of taxes 0.12 0.04 (0.02) (0.04) 0.02
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings available to common stockholders as
adjusted $3.06 $ 2.03 $ 1.99 $ 1.73 $ 4.36
============================================================================================================================
Diluted net earnings per common share:
Net earnings available to common stockholders as
previously reported $ 2.84 $ 1.93 $ 1.96 $ 1.71 $ 4.15
Adjustment for effect of the change from LIFO to FIFO
applied retroactively, net of taxes 0.12 0.04 (0.02) (0.04) 0.03
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings available to common stockholders as
adjusted $ 2.96 $ 1.97 $ 1.94 $ 1.67 $ 4.18
============================================================================================================================
11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial Statements
included in this Current Report on Form 8-K. Dollars are in millions, except per
share amounts. Percentages are approximate.
GENERAL
Cytec Industries Inc. is a global specialty chemicals and materials company and
sells its products to diverse major markets for aerospace, automotive and
industrial coatings, chemical intermediates, mining, plastics and water
treatment. With slightly over half of the Company's sales outside of the U.S.,
sales volume by region and the impact of exchange rates are important measures
that are analyzed by management.
Effective January 1, 2005, the Company changed its inventory costing method for
U.S. inventories from the LIFO method to the FIFO method. Previously reported
amounts have been restated for all periods presented. Additionally, the Company
realigned the organizational structure of its four reportable segments. The
segments are as follows: (i) Cytec Performance Specialties includes the product
lines of Water Treatment Chemicals, Mining Chemicals, Phosphine and Phosphorus
Derivatives, Polymer Additives and Specialty Additives; (ii) Cytec Surface
Specialties includes the product lines of Coating Chemicals and Performance
Chemicals; (iii) Specialty Materials has been renamed Cytec Engineered
Materials; (iv) Building Block Chemicals remains unchanged. The Cytec
Performance Specialties and Cytec Surface Specialties segments are collectively
referred to as Specialty Chemicals. The Company also reports its net sales in
four geographic regions: North America, Latin America, Asia/Pacific and
Europe/Middle East/Africa. The destination of the sale determines the region
under which it is reported consistent with management's view of the business.
North America consists of the United States and Canada. Latin America includes
Mexico, Central America, South America and the Caribbean Islands. Asia/Pacific
is comprised of Asia, Australia and the islands of the South Pacific Rim. The
historical financial results presented in this section have been restated to
conform to the new operating segment reporting structure and to show the
retroactive effect of the change to FIFO.
Raw material cost changes year on year are an important factor in profitability
especially in years of high volatility. Oil and natural gas costs are
significantly higher than the year ago period and many of the Company's raw
materials are derived from these two commodities. Key raw materials for the
Specialty Chemicals and Building Block Chemicals segments are propylene,
ammonia, methanol derivatives and natural gas for utilities. Key raw materials
for the Cytec Engineered Materials segment are carbon fiber and various resins.
Discussion of the year to year impact of raw materials and energy is provided in
our segment discussion. In addition, higher global demand levels and,
occasionally, operating difficulties at suppliers, have limited the availability
of certain of the Company's raw materials. With the exception of propylene
availability in the first quarter, this did not have a material impact on
results of operations in 2004. The Company was recently notified by its major
supplier of propylene that as of February 1, 2005, it will be placed on an 85%
supply allocation of its requirements for up to six months due to mechanical
difficulties. Management does not expect this allocation to have a material
impact on Company operations in the first quarter of 2005 should it occur for
the term anticipated.
In the course of the Company's ongoing operations, a number of strategic product
line acquisitions and dispositions have been made. All acquisitions have been
recorded using the purchase method of accounting. Accordingly, the results of
operations of the acquired companies have been included in the Company's
consolidated results from the dates of the respective acquisitions. A further
discussion of acquisitions and dispositions can be found in Note 2 to the Notes
to the Consolidated Financial Statements contained herein.
12
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship that certain items in
the Company's Consolidated Statements of Income bear to net sales:
Years Ended December 31, 2004 2003 2002
- -------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Manufacturing cost of sales 75.7 75.5 75.9
- -------------------------------------------------------------------------------
Gross profit 24.3 24.5 24.1
Selling and technical services 8.1 8.6 9.1
Research and process development 2.3 2.4 2.5
Administrative and general 3.8 3.3 3.5
Amortization of acquisition intangibles 0.3 0.3 0.2
- -------------------------------------------------------------------------------
Earnings from operations 9.8 9.9 8.8
===============================================================================
Net earnings available to common stockholders 7.0 5.4 5.8
===============================================================================
NET SALES BY SEGMENT AND GEOGRAPHIC AREA
Europe/
North Latin Asia/ Middle East/
Net Sales America America Pacific Africa Total
- --------------------------------------------------------------------------------------------------------------------------
2004
Cytec Performance Specialties $267.1 $103.3 $101.8 $198.1 $670.3
Cytec Surface Specialties 149.1 16.9 61.6 75.8 303.4
Cytec Engineered Materials 322.4 1.7 21.5 141.4 487.0
Building Block Chemicals 126.6 3.3 77.0 53.7 260.6
------------- -------------- ------------ --------------- ------------
Total $865.2 $125.2 $261.9 $469.0 $1,721.3
------------- -------------- ------------ --------------- ------------
2003
Cytec Performance Specialties $249.9 $75.0 $97.1 $162.9 $ 584.9
Cytec Surface Specialties 145.3 14.1 40.7 67.0 267.1
Cytec Engineered Materials 292.3 1.6 15.5 99.3 408.7
Building Block Chemicals 88.9 4.0 58.0 60.2 211.1
------------- -------------- ------------ --------------- ------------
Total $776.4 $94.7 $211.3 $389.4 $1,471.8
------------- -------------- ------------ --------------- ------------
2002
Cytec Performance Specialties $238.1 $66.3 $88.9 $ 142.7 $ 536.0
Cytec Surface Specialties 144.7 11.4 33.5 57.9 247.5
Cytec Engineered Materials 290.7 1.3 14.7 88.8 395.5
Building Block Chemicals 68.9 3.9 60.2 34.2 167.2
------------- -------------- ------------ --------------- ------------
Total $742.4 $82.9 $197.3 $323.6 $1,346.2
==========================================================================================================================
Net sales in the United States were $802.4, $719.7 and $685.8 for 2004, 2003 and
2002, respectively. International net sales were $918.9, $752.1, and $660.4, or
53%, 51% and 49% of total net sales, for 2004, 2003 and 2002, respectively.
For more information on the Company's segments, refer to Note 16 of the Notes to
Consolidated Financial Statements and further discussions in "Segment Results,"
below.
YEAR ENDED DECEMBER 31, 2004, COMPARED WITH YEAR ENDED DECEMBER 31, 2003
Consolidated Results
Net sales for 2004 were $1,721.3 compared with $1,471.8 during 2003. All
segments reported increased sales. In the two Specialty Chemicals segments sales
increased primarily due to increased selling volumes, the acquisitions completed
in the second half of 2003 and favorable exchange rates. The Cytec Engineered
Materials segment sales increase was primarily volume related and all product
lines participated. The Building Block Chemicals segment sales increased
principally due to higher selling prices which were driven by higher raw
material and energy costs offset somewhat by a decrease in sales volumes of
acrylonitrile and acrylamide.
13
For a detailed discussion on sales refer to the Segment Results section below.
Manufacturing cost of sales was $1,303.1 compared with $1,111.9 during 2003.
Cost of sales was primarily impacted by higher raw material and energy costs of
$69.0. Gross margin percent however, decreased by only 0.2% as the higher raw
material and energy costs were offset by increased selling prices of $42.1, the
net impact of exchange rates on operations outside of the United States of
$35.1, the fixed cost leverage from the increased production levels and a
favorable product mix.
Pension expense increased $5.1 principally as a result of the Company lowering
its discount rate in the U. S. by 0.5% to reflect current market rates on fixed
income securities and by the 2003 acquisitions which increased pension expense
by $0.3. Pension expense is primarily reported in manufacturing cost of sales.
Refer to Critical Accounting Policies, Retirement Plans for further discussion
on how changes in discount rates and return on asset assumptions can impact
annual expense.
Selling and technical services was $139.8 in 2004 versus $126.9 in the prior
year due to ongoing costs of the businesses in the Specialty Chemical segments
acquired in the second half of 2003, the impact of exchange rate changes on
operations outside of the United States of $4.2 and higher costs in the Cytec
Engineered Materials segment of $2.0 where the Company is investing in
personnel, product qualifications and commercialization of new products for its
growth initiatives.
Research and process development was $40.0 versus $35.2 in the prior year. This
increase was primarily the result of ongoing costs of the acquired businesses of
the Specialty Chemical segments completed in the second half of 2003, costs
associated with the start up of the newly renovated Specialty Chemicals
Technology Center and higher costs in the Cytec Engineered Materials segment
where the Company continues to invest for a number of future opportunities.
Administrative and general expenses were $65.1 versus $49.7 in the prior year.
Included in 2004 is a charge of $8.0 related to the settlement of the federal
carbon fiber class action lawsuit and several other minor litigation matters.
Also contributing to the increase were ongoing costs of the businesses of the
Specialty Chemical segments acquired in the second half of 2003 of approximately
$1.3, an increase in deferred compensation expense of $2.6 due to the increase
in the Company's stock price versus the year ago period and the impact of
exchange rate changes on operations outside of the U.S. of $1.1. Additionally,
the Company incurred $2.0 in third party expenses related to implementing
accounting and disclosure control procedures as required by the Sarbanes-Oxley
Act of 2002.
Other income, net was $16.9 compared with a loss of $5.7 in the prior year.
Included in 2004 results was a net gain of $26.8 related to derivative contracts
entered into during the fourth quarter to economically hedge currency and
interest rate exposure associated with the pending acquisition of Surface
Specialties. The Company entered into foreign currency contracts to offset the
potential dollar to euro exchange rate fluctuation that would have an impact on
the acquisition cost in dollars and this resulted in a gain of $33.3. In
anticipation of future long-term debt that would be issued to partially finance
the acquisition, the Company also entered into interest rate hedges which
resulted in the recognition of a loss of $6.5. Also included in other income,
net are charges of $6.2 for settlement of several environmental remediation and
toxic tort lawsuits and a charge of $2.0 related to the settlement of a series
of disputed matters with Wyeth, partially offset by a gain of $2.0 related to
the sale in 1999 of the Company's share of its methanol joint venture whereby
the Company received additional proceeds because the market price of methanol
stayed above an agreed upon index over a predetermined period of time. The
Company also recorded $3.0 in other income, net, of which $1.0 has been
received, that relates to insurance recoveries and expected recoveries from its
insurers of lead-related defense costs which had been previously expensed.
Lead-related defense costs recognized during 2004 amounted to $2.5. The prior
year loss of $5.7 primarily resulted from the recognition of currency losses
whereby certain international subsidiaries held dollar denominated assets while
the US dollar weakened.
Equity in earnings of associated companies was $5.2 versus $7.2 in the prior
year. Earnings from CYRO, the Company's 50% owned acrylic plastics joint
venture, remained flat as compared with the prior year as increased sales
volumes and selling prices offset higher raw material costs. In addition,
results for 2003 included earnings of $1.8 from the Company's former 50% owned
Mitsui-Cytec joint venture. Refer to Notes 2 and 5 of the Notes to Consolidated
Financial Statements.
Interest expense, net was $17.4 compared with $16.2 in the prior year. The
increase resulted primarily from a higher outstanding weighted-average debt
balance during 2004.
The Company's effective tax rate in 2004 was 24.0% compared with 28.3% in 2003.
This reduction reflects the Company's continued earnings growth in lower tax
jurisdictions and, to a lesser extent, a favorable international tax ruling
received in the first quarter of 2004. During the second quarter of 2004, the
Company recorded a reduction of its tax liabilities due to the completion of
several years of tax audits in an international tax jurisdiction that resulted
in a reduction of $2.4 to its income tax provision. These reductions were
partially offset by the derivative net gain noted above which was taxed at the
higher incremental U.S. rate.
14
Net earnings available to common stockholders for 2004 were $121.1 ($2.96 per
diluted share). Net earnings available to common stockholders for 2004 included
a charge of $9.9 ($0.24 per diluted share) as a result of the redemption of the
Company's Series C Preferred Stock (the "Series C Stock"). The Series C Stock
was originally issued in 1993 in conjunction with Cytec's spin-off from American
Cyanamid Company ("Cyanamid"). Wyeth became beneficial owner of Series C Stock
following its acquisition of Cyanamid in 1994. Net earnings available to common
stockholders for 2003 were $79.2 ($1.97 per diluted share). Included in 2003
results is an after-tax, non-cash charge of $13.6 ($0.34 per diluted share)
reported as a cumulative effect of accounting change related to the adoption of
SFAS No.143, "Accounting for Asset Retirement Obligations" which became
effective January 1, 2003.
Segment Results
Year-to-year comparisons and analyses of changes in net sales by product line
segment and region are set forth below.
Cytec Performance Specialties
% Change Due to
Total ----------------------------------------
2004 2003 % Change Price Volume/Mix Currency
- -----------------------------------------------------------------------------------------------------------------------------
North America $267.1 $249.9 7% 1% 6% 0%
Latin America 103.3 75.0 38% -2% 37% 3%
Asia/Pacific 101.8 97.1 5% 0% 2% 3%
Europe/Middle East/Africa 198.1 162.9 22% 1% 13% 8%
------------- ------------
Total $670.3 $584.9 15% 0% 11% 4%
==============================================================================================================================
Overall selling volumes improved 11% with acquisitions accounting for 6%. The 5%
increase in base selling volumes is attributable to increased sales across all
product lines, mining chemicals and water treatment chemicals. On a regional
basis, sales volumes in Latin America increased 37% with acquisitions accounting
for 11% and the remainder of the increase primarily due to improved demand for
mining chemicals from copper mining applications. Sales volumes were up 13% in
Europe/Middle East/Africa with acquisitions accounting for 9% and the remainder
of the increase primarily due to increased demand for water treatment chemicals
from full service providers and phosphine applications.
Earnings from operations were $50.4, or 8% of sales, compared with $34.1 or 6%
of sales in 2003. The increase in earnings is primarily attributable to
increased selling volumes, in part due to acquisitions during the second half of
2003, and the impact of exchange rate changes partly offset by increased raw
material and energy costs of $10.9.
Cytec Surface Specialties
% Change Due to
Total ----------------------------------------
2004 2003 % Change Price Volume/Mix Currency
- -----------------------------------------------------------------------------------------------------------------------------
North America $149.1 $145.3 3% -1% 4% 0%
Latin America 16.9 14.1 20% 0% 19% 1%
Asia/Pacific 61.6 40.7 51% -2% 51% 2%
Europe/Middle East/Africa 75.8 67.0 13% 1% 4% 8%
------------- ------------
Total $303.4 $267.1 14% -1% 12% 3%
=============================================================================================================================
Overall selling volumes increased 12% with acquisitions accounting for 6%. Base
selling volumes increased for all product lines as a result of improved demand
and new business. On a regional basis, Asia/Pacific sales volumes increased 51%
with acquisitions accounting for 41%. Latin America sales volumes increased 19%
and resulted from increased demand for coatings. Europe/Middle East/Africa sales
were up 13% due to the favorable impact of exchange rate changes and increased
demand primarily for coatings chemicals.
Earnings from operations were $35.8, or 12% of sales, compared with $26.6, or
10% of sales, in 2003. The favorable impact from acquisitions, higher base sales
volumes, improved manufacturing operations and net favorable exchange rate
changes more than offset the effect of higher raw material and energy costs of
$0.6.
15
Cytec Engineered Materials
% Change Due to
Total ----------------------------------------
2004 2003 % Change Price Volume/Mix Currency
- ---------------------------------------------------------------------------------------------------------------------------------
North America $322.4 $292.3 10% 0% 10% 0%
Latin America(1) 1.7 1.6 --- --- --- ---
Asia/Pacific 21.5 15.5 39% -1% 40% 0%
Europe/Middle East/Africa 141.4 99.3 42% -3% 40% 5%
------------- ------------
Total $487.0 $408.7 19% -1% 19% 1%
=================================================================================================================================
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
Overall selling volumes increased 19% with the increases coming from large
commercial aircraft, regional and business jets and rotorcraft, military and
high performance automotive sectors. On a regional basis, the 10% increase in
North America sales volumes represents increased sales primarily to large
commercial aircraft, military, business and regional jet and rotorcraft
applications. Europe/Middle East/Africa sales volumes increased 40% principally
due to increased sales to large commercial aircraft and high performance
automotive applications as well as to business and regional jet and rotorcraft
applications. Asia/Pacific sales volumes increased 40% principally due to
increased sales for large commercial aircraft and regional and business jets.
The overall decrease in average selling price was primarily due to increased
volume rebates.
Earnings from operations were $83.4, or 17% of sales, compared with $66.0, or
16% of sales, in 2003. Higher earnings are principally due to the increase in
selling volumes partly offset by increased manufacturing and commercial costs to
service the higher demand levels and growth opportunities of this segment.
Building Block Chemicals (Sales to external customers)
% Change Due to
Total ----------------------------------------
2004 2003 % Change Price Volume/Mix Currency
- ------------------------------------- -------------- ------------ ---------------- --------- ---------------- -------------
North America $ 126.6 $ 88.9 43% 25% 18% 0%
Latin America(1) 3.3 4.0 --- --- --- ---
Asia/Pacific 77.0 58.0 33% 35% -2% 0%
Europe/Middle East/Africa 53.7 60.2 -11% 6% -23% 6%
-------------- ------------
Total $260.6 $211.1 23% 22% -1% 2%
- ------------------------------------- -------------- ------------ ---------------- --------- ---------------- -------------
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
Global sales volumes declined slightly due in part to decreased acrylonitrile
production as a result of reduced propylene (the key raw material for
acrylonitrile) availability during the first quarter as well as a scheduled
plant maintenance shutdown during May 2004. North America selling volumes were
up 18% with the majority due to increased acrylonitrile and sulfuric acid
business. Europe/Middle East/Africa volumes decreased as 2003 reflected
opportunistic sales in this region resulting from more favorable spot selling
prices versus the Asia/Pacific region. North America and Asia/Pacific selling
prices were up primarily reflecting partial recovery of higher raw material and
energy costs.
Earnings from operations were $15.6, or 6% of sales, compared with $20.7, or 10%
of sales, in 2003. The decrease in earnings was primarily due to the decrease in
volume and increased raw material and energy costs of $48.0, which were not
fully offset by price increases of $46.0.
YEAR ENDED DECEMBER 31, 2003 COMPARED WITH YEAR ENDED DECEMBER 31, 2002
Consolidated Results
Net sales for 2003 were $1,471.8, up 9%, compared to $1,346.2 for 2002. Overall,
sales volume increased 5% with acquisitions accounting for 2% of this increase,
favorable changes in currency rates adding 3%, and higher selling prices adding
1%.
For a detailed discussion on sales refer to the Segment Results section below.
Manufacturing cost of sales was $1,111.9, or 75.5% of net sales, for 2003
compared with $1,021.4, or 75.9% of net sales, for 2002. Included in 2002 is a
$10.8 net restructuring charge or 1.0% of net sales for plant closure costs and
expenses associated with discontinuing a product line. Additional savings
related to 2002 restructuring initiative were $1.4 in 2003 which was the result
of planned personnel reductions under the 2002 initiative. Manufacturing costs
in 2003 were also impacted by higher raw material and energy costs of $37.4,
particularly from petroleum based products globally and natural gas based
16
products in the U. S. and currency rate changes increased cost $18.2 Freight and
warehousing increased $6.6 of which $3.0 was due to currency rates changes. The
remainder of the increase in freight and warehousing is due primarily to sales
volume increases as well as higher freight rates and fuel surcharges. Insurance
costs increased $1.7 over 2002. Partially offsetting this were lower costs as a
result of the Company's operational excellence initiatives.
Pension expense increased $5.2 principally as a result of the Company lowering
its discount rate in the U. S. by 0.5% to reflect current market rates on fixed
income securities and by the 2003 acquisitions which increased pension expense
by $0.3. This was partly offset by plan changes to the retirement medical plans
in the U. S. which were instituted by the Company in 2002 and reduced expense by
$0.7. Pension expense is primarily reported in manufacturing cost of sales.
Refer to Critical Accounting Policies, Retirement Plans for further discussion
on how changes in discount rates and return on asset assumptions can impact
annual expense.
Selling and technical services increased $4.3. Included in prior year amounts
are net restructuring charges of $2.5. Additional savings related to 2002
restructuring were $1.1 in 2003 primarily as a result of planned personnel
reductions. Costs associated with the acquisitions in 2003 added $2.6 and costs
associated with the Company's performance stock plan increased by $1.1 due to a
higher market value for the Company's common stock. The remainder of the
increase is primarily due to currency rate changes.
Research and process development increased $1.5. Included in the prior year are
net restructuring charges of $1.0. Costs associated with the acquisitions in
2003 added $0.5. Headcount additions and costs for outside testing in the
Specialty Chemical segments accounted for the increase in costs.
Administrative expenses increased $2.7 but included in prior year amounts are
net restructuring charges of $0.8 and fees of $1.7 related to a research and
development tax credit filing. The Company's performance stock plan increased
costs by $1.5 due to the higher stock price. The acquisitions of 2003 added $0.7
to administrative costs in 2003 and insurance premiums increased $1.1 over 2002.
Currency rate changes also increased costs.
The increase in amortization expense is due to the impact of amortizing
acquisition intangibles associated with 2003 acquisitions.
Other expense, net increased $6.9 from the year ago period. This resulted
primarily from currency losses where certain of our international subsidiaries
held dollar denominated assets when the U.S. dollar weakened. Currency rate
changes increased expenses compared to 2002 by $5.3. Cleanup costs of $0.6 at an
operating site related to a divested product line and royalty income of $0.8
that expired in 2002 also contributed to the increase.
Equity in earnings of associated companies increased $1.1 from the year ago
period. Included in 2002 results was a restructuring charge of $0.4 representing
the Company's 50% share of restructuring charges recorded by CYRO, and a charge
of $1.7 to reduce to zero the carrying value of the Company's net investment in
the one-third owned PA.com. In addition, the Company's share of operating losses
from PA.com in 2002 totaled $0.9. CYRO had increased sales of 5% in 2003,
however its product mix was less favorable and raw material and energy costs
were higher than the year ago period. As a result, the Company's share of
earnings in 2003 from CYRO decreased by $1.7.
Interest expense, net was $16.2, a decrease of $0.3, from the prior year period.
Interest income in 2002 was favorably impacted by $2.0 received in conjunction
with research and development tax credit refund. In March 2003, the Company
repaid $100.0 of its existing debt with an interest rate of 6.5% per annum
resulting in lower interest expense. This was largely offset by interest expense
related to the $200.0 principal amount of 4.6% Notes that were issued in June
2003. The interest expense associated with this new debt was partially reduced
by $0.7 as a result of interest rate swap agreements entered into in August
2003.
Income tax provision reflects a reduction in the effective tax rate from 33.4%,
before the impact of prior years' tax credits, to 28.3%. This reduction was a
result of the Company's continued emphasis on global tax planning and execution
of those plans together with an increased level of investment and earnings in
tax jurisdictions with lower rates as well as a favorable international tax
ruling with respect to a legal entity restructuring that occurred in the prior
year. The 2002 full year effective tax rate of 27.9% reflects a reduction for a
tax refund of $6.0 associated with prior year's research & development tax
credits.
Net earnings before the cumulative effect of the accounting change were $92.8,
or $2.31 per diluted share, for 2003, compared to $78.7, or $1.94 per diluted
share, in 2002. Included in 2002 was an after-tax net restructuring charge of
$9.4, or $0.23 per diluted share. Also included in 2002 is a net credit of $0.15
per diluted share related to research and development tax credits discussed
above (a reduction of $6.0 in income tax provision, interest income of $2.0 or
$1.3 after-tax, and a charge of $1.7 or $1.1 after-tax in administrative
expenses for fees related to tax planning).
17
On January 1, 2003, the Company adopted SFAS No. 143 and recorded an after-tax,
non-cash charge of $13.6 ($0.34 per diluted share) reported as a cumulative
effect of an accounting change.
Net earnings after the cumulative effect of the accounting change were $79.2 or
$1.97 per diluted share.
Segment Results
Year-to-year comparisons and analyses of changes in net sales by product line
segment and region are set forth below.
Cytec Performance Specialties
% Change Due to
Total ----------------------------------------
2003 2002 % Change Price Volume/Mix Currency
- -------------------------------------------- ------------- ------------ ---------------- --------- ---------------- -------------
North America $249.9 $238.1 5% -2% 6% 1%
Latin America 75.0 66.3 13% 1% 15% -3%
Asia/Pacific 97.1 88.9 9% -6% 7% 8%
Europe/Middle East/Africa 162.9 142.7 14% -2% 1% 15%
------------- ------------
Total $584.9 $536.0 9% -2% 6% 5%
- -------------------------------------------- ------------- ------------ ---------------- --------- ---------------- -------------
Overall, sales increased 9% with acquisitions accounting for 4%. Currency rate
changes increased sales 5% principally resulting from the stronger euro. Base
volume increased 6%, and selling prices declined 2%. North American volumes
increased 6% and primarily resulted from acquisitions. Also, the Water Treatment
product line selling volume was down as the Company exited certain low profit
municipal business but this was offset by increased Phosphine gas sales. In
Latin America, the volume growth of 15% was primarily in the mining chemicals
product line as a result of higher demand in the alumina market and acquisitions
accounting for 2%. Currency rate changes were primarily the result of the weaker
U. S. dollar, except in Latin America where the U. S. dollar remained strong for
the first three quarters of 2003. Selling prices decreased in North America in
nearly all product lines due to customer mix and competitive pricing. Latin
America pricing increased offsetting the impact of negative currency rate
changes. Asia/Pacific selling prices decreased principally in mining chemicals
where pricing was linked to the U. S. dollar with an offsetting effect due to
currency rate changes. Prices in Asia/Pacific were down in part due to continued
competitive pricing initiatives in Polymer Additives.
Earnings from operations were $34.1 or 6% of net sales in 2003, compared to
$42.7, or 8% of net sales, in 2002. The decrease in earnings is attributable to
manufacturing difficulties experienced in the polymer additives product line
resulting in a $3.6 operating loss for that business and higher raw material and
energy costs of $3.0, higher freight, warehousing, employee benefit and
insurance costs.
Cytec Surface Specialties
% Change Due to
Total ----------------------------------------
2003 2002 % Change Price Volume/Mix Currency
- -------------------------------------------- ------------- ------------ ---------------- --------- ---------------- -------------
North America $145.3 $144.7 0% 2% -2% 0%
Latin America 14.1 11.4 24% 11% 22% -9%
Asia/Pacific 40.7 33.5 21% -2% 21% 2%
Europe/Middle East/Africa 67.0 57.9 16% 3% -4% 17%
------------- ------------
Total $267.1 $247.5 8% 2% 2% 4%
- -------------------------------------------- ------------- ------------ ---------------- --------- ---------------- -------------
Overall, sales increased 8% with the 2003 acquisitions accounting for 2%.
Currency rate changes increased sales 4%, principally from the stronger euro
offset somewhat by overall weakness in Latin American currencies. Base volumes
and selling prices were up slightly. The Company experienced strong demand in
the Asia/Pacific and Latin America regions although off a smaller base but this
was almost all offset by lower demand in Europe and North America due to reduced
economic activity in those regions. Selling prices were up in Latin America
offsetting the negative impact of currency rate changes.
Earnings from operations were $26.6, or 10% of net sales, in 2003 compared to
$22.1, or 9% of net sales, in 2002. The impact from the increase in sales was
partially offset by higher raw material and energy costs of $6.4, increased
freight, warehousing, employee benefit and insurance costs.
18
Cytec Engineered Materials
% Change Due to
Total ----------------------------------------
2003 2002 % Change Price Volume/Mix Currency
- -------------------------------------------- ------------- ------------ ---------------- --------- ---------------- -------------
North America $292.3 $290.7 1% 0% 1% 0%
Latin America(1) 1.6 1.3 --- --- --- ---
Asia/Pacific 15.5 14.7 4% -2% 6% 0%
Europe/Middle East/Africa 99.3 88.8 12% -3% 11% 4%
------------- ------------
Total $408.7 $395.5 3% -1% 3% 1%
- -------------------------------------------- ------------- ------------ ---------------- --------- ---------------- -------------
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
Selling volumes were up 3% overall. Sales to military and rotorcraft
applications added 5% due to increased production levels for military aircraft
and a high level of replacement parts for rotorcraft and restocking by certain
customers from low 2002 year-end inventory levels. Sales to the commercial
aerospace sector for large commercial aircraft, regional jets and business jets
were down 2% from 2002. Sales to Boeing were down in line with the decrease in
large commercial aircraft build rates but offset somewhat by increased sales to
Airbus.
Earnings from operations were $66.0 or 16% of sales, in 2003 compared to $65.8,
or 17% of sales, in 2002. Included in 2003 were increased savings from the 2002
restructuring initiative of $0.5 million as a result of planned personnel
reductions. The impact from the increase in sales, restructuring savings and
higher plant utilization was essentially offset by higher operating costs as the
Company invested in its manufacturing plants and increased its selling and
technical efforts.
Building Block Chemicals (Sales to external customers)
% Change Due to
Total ----------------------------------------
2003 2002 % Change Price Volume/Mix Currency
- ------------------------------------------- -------------- ------------ ---------------- --------- ---------------- -------------
North America $ 88.9 $68.9 29% 15% 14% 0%
Latin America(1) 4.0 3.9 --- --- --- ---
Asia/Pacific 58.0 60.2 -4% 15% -19% 0%
Europe/Middle East/Africa 60.2 34.2 76% 3% 54% 19%
-------------- ------------
Total $211.1 $167.2 26% 12% 10% 4%
- ------------------------------------------- -------------- ------------ ---------------- --------- ---------------- -------------
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
Selling volumes increased 10% overall. North American and European acrylonitrile
volumes were up due to new business. Demand in Asia/Pacific for acrylonitrile
was low principally in the second quarter of the year. Selling prices were up
primarily related to acyrlonitrile due to tighter supply and increased input
costs.
Earnings from operations were $20.7, or 10% of net sales, in 2003 compared to
$5.4, or 3% of net sales, in 2002. The increased earnings were primarily the
result of higher selling volumes and prices and the favorable impact of currency
rate changes. Additionally, earnings increased due to lower plant spending of
$3.2 and higher plant capacity utilization. The increase was partially offset by
significantly higher raw material and energy costs of $22.3 which were primarily
due to the higher cost of ammonia, propylene and natural gas.
LIQUIDITY AND FINANCIAL CONDITION
At December 31, 2004 the Company's cash balance was $323.8 compared with $251.1
at year end 2003.
Cash flows provided by operating activities, which continued to be the primary
source of funds to finance operating needs and capital expenditures, were $167.4
for 2004 compared with $132.4 for 2003. The increase in cash flows provided by
operating activities resulted from an increase in current period income from
operations and $18.9 million related to closing various currency contracts that
were entered into relative to the anticipated acquisition of Surface
Specialties. Trade accounts receivables increased by $24.1 as a result of
increased sales. Inventory levels increased by $46.8 due to increased production
to support higher customer demand as well as higher raw material costs. Accounts
payable increased by $36.5, primarily due to increased raw material costs and
purchases to support increased demand levels. Cash flows provided by operating
activities were reduced by $48.0 and $46.2 from cash contributions to pension
plans and postretirement plans during 2004 and 2003, respectively.
Cash flows used in investing activities were $84.1 for 2004 compared with $195.3
for 2003. Capital spending, which totaled $89.3, included spending on projects
to: upgrade and modernize the Stamford, Connecticut Specialty Chemicals research
facility; expand capacity at the Oestringen, Germany manufacturing facility;
upgrade the Willow Island, West Virginia manufacturing facility; and upgrade two
19
plants acquired during 2003. During the first quarter of 2004, the Company
received from a third party $9.1, net of expenses, as a prepayment for a
long-term lease on a certain property for future development. The development of
the property is not connected with Company operations. The third party has the
option to purchase the property from the Company at a later date. The net
proceeds are being amortized to income over the life of the lease. Prior year
investing activities included cash flows of $101.6 used to acquire the MEP and
I&S product lines of Avecia Investments Limited.
Net cash flows used in financing activities were $20.6 in 2004 compared with net
cash flows provided by financing activities of $85.4 during 2003.
Proceeds from stock option exercises totaled $24.6 compared with $14.5 during
2003. The total number of treasury shares reissued as a result of option
exercises was approximately 1,217,500 in 2004 compared with approximately
1,079,800 in 2003. The Company repurchased 388,300 shares of stock at a cost of
$13.1 compared with the repurchase of 838,200 shares of stock at a cost of $27.7
during 2003.
During 2004, the Company paid off all of the $9.3 in short term borrowings and
also redeemed its Series C Stock for $10.0 in cash.
During 2004, the Company paid four quarterly cash dividends of $0.10 per common
share which aggregated $15.7.
On January 20, 2005, the Board of Directors declared a quarterly cash dividend
of $0.10 per common share, paid on February 25, 2005 to stockholders of record
as of February 10, 2005.
In June 2003, the Company sold $200.0 principal amount of 4.6% Notes due July 1,
2013. Proceeds to the Company from the sale of the Notes after deducting costs
were approximately $198.9. The Company has the ability to issue $200.0 more debt
securities under a $400.0 shelf registration statement it has filed with the
Securities and Exchange Commission that has been effective since December 2000.
On February 15, 2005, the Company entered into credit agreements totaling $1.775
billion in preparation for the upcoming acquisition of Surface Specialties. The
agreements provide: a $725.0 5-year term loan facility, a $700.0 364-day credit
facility, and a $350.0 5-year revolving credit facility. The term loan and
364-day facilities will be used to finance the acquisition and the revolving
credit facility will provide additional liquidity for general corporate
purposes, including acquisitions. The facilities contain covenants that are
customary for such facilities.
On October 1, 2004, the Company announced that it had signed a definitive
agreement to purchase the Surface Specialties business of UCB, a Belgium
biopharmaceutical and specialty chemical company, for cash and stock, valued at
that time, of 1.5 billion euros. In early February 2005, the Company reached
agreement with UCB to modify the terms of the purchase agreement. Assuming the
dollar to euro exchange rate is 1.3 to 1 and Cytec common stock is $51 per
share, the transaction would be valued at $1.841 billion of which 1.140 billion
euros ($1.482 billion) will be paid in cash and the balance will be paid in
5,772,857 shares of Cytec common stock ($294.0). In addition, there is
contingent consideration up to a maximum of 50 million euros ($65.0), of which
20 million euros ($26.0) will be paid up front with the balance payable in 2006.
The contingent consideration will be earned on a pro-rata basis pending the
achievement of certain operating results by Surface Specialties in 2005. UCB
also agreed to reimburse Cytec 15 million euros ($19.5) for transaction related
costs. The acquisition is subject to customary closing conditions including the
approval of the U.S. Federal Trade Commission. The Company anticipates closing
on this transaction in the first quarter of 2005.
Upon closing, UCB would own approximately 12% of the outstanding shares of Cytec
and will enter into a stockholders agreement that will provide that UCB must
reduce its stake to less than 9% within three years, less than 7% within four
years and less than 5% within five years and that will contain other customary
terms and provisions.
At closing, the Company expects to finance the cash portion of the acquisition
with combined bank borrowings of approximately $1,320.0 under the two
acquisition related credit facilities that were executed on February 15, 2005
and approximately $200.0 of available cash balances. Approximately $600.0 of the
bank debt will be refinanced on a long-term basis in the public debt markets
after the acquisition.
The acquisition complements Cytec's existing product lines by significantly
increasing Cytec's product offering to the coatings industries including the
general industrial, automotive, architectural, plastic, graphic arts and wood
sectors.
The global Surface Specialties business had sales and earnings before interest,
taxes and depreciation prepared in accordance with accounting principles
generally accepted in Belgium and which are unaudited, of 1.112 billion euros
and 147 million euros, respectively, ($1.446 billion and $191 million,
respectively, at 1.3 U.S. dollar per euro) in 2004. Many of the Surface
Specialties product lines such as UV cure, powder and waterborne systems have
above average growth rates.
20
Cytec intends to operate the Surface Specialties business as a separate segment
and will integrate the existing Cytec coatings chemicals and performance
chemicals product lines into the new segment.
Surface Specialties also has a significant amino resins business. The Company
has agreed with the European Union Commission, and expects to reach a similar
agreement with the U.S. Federal Trade Commission, that it will divest UCB's
amino resins business after it purchases Surface Specialties and that prior to
the divestment, Surface Specialties amino resins business will be held
separately and will report to an independent trustee. After the transaction is
consummated, for the duration that the resins business is owned by Cytec, its
results of operations will be classified as results from discontinued operations
on Cytec's consolidated statements of income. The Company will use the proceeds
to reduce debt. Sales of Surface Specialties' amino resin product line, prepared
in accordance with accounting principles generally accepted in Belgium and which
are unaudited in 2004, were approximately $150.0.
Through February 16, 2005, the Company has entered into $623.2 of
forward-starting interest rate swaps to hedge the benchmark interest rate and
credit spread on a portion of the debt that will be issued to finance the
acquisition of Surface Specialties. The weighted-average interest rate of 4.69%
for the U.S dollar swaps includes the current swap credit spread of
approximately 38 basis points and premium of approximately 3 basis points for
the forward starting element of the swap. The corresponding euro swaps have a
weighted-average interest rate of 3.97% and include the current swap credit
spread of approximately 16 basis points and premium of approximately 1 basis
point for the forward starting element of the swap. The credit spread portions
of the swaps are representative of AA rated 10-year notes and serve as a proxy
credit spread for the Company. The Company's actual credit spread at the time of
debt issuance will be determined primarily based on its actual credit rating and
market conditions. The swaps, which mature in March 2005, are marked to market
and recorded currently in earnings until maturity or settlement. As of February
16, 2005, the Company has hedged approximately 90% of the anticipated portion of
the purchase price that will be refinanced with long-term debt. As of February
16, 2005, the net impact of the marked to market value on these swaps was a loss
of approximately $13.7 of which $6.5 was recorded in 2004.
Through February 16, 2005, the Company has entered into foreign currency forward
contracts totaling 1.002 billion euros that relate to approximately 84% of the
euro exposure of 1.190 billion for the cash component of the Surface Specialties
acquisition. The Company has hedged approximately 93% of the cash euro exposure
with these forward contracts together with natural hedges of approximately 100.8
euros. The forward contracts, which mature on February 28, 2005, are marked to
market and recorded currently in earnings until settlement or maturity. As of
February 16, 2005, the cumulative impact of the marked to market adjustment on
these forward contracts and certain forward contracts which were closed during
2004, was a net loss of approximately $8.7. A gain of $33.3 was recorded in 2004
of which $18.9 was realized.
In connection with the acquisition, the Company suspended its stock buy-back
program and does not anticipate making future stock buy-backs for at least two
years following closing in order to maximize funds available for debt service
and other corporate purposes.
The Company believes that, based on its expected operating results for 2005, it
will be able to fund operating cash requirements, including the debt service
requirements related to the anticipated acquisition of Surface Specialties,
planned capital expenditures and dividends from internal cash generation, which
would include cash generated from the operations of Surface Specialties after
acquisition.
At December 31, 2004 and 2003, long-term debt, including the current portion in
2004, consisted of the following:
2004 2003
---------------------------------------------------------------
Carrying Carrying
Face Value Face Value
---------------------------------------------------------------
6.75% Notes Due March 15, 2008 $100.0 $ 98.2 $100.0 $ 97.7
6.846% Mandatory Par Put Remarketed Securities 120.0 119.0 120.0 118.9
4.60% Notes Due July 1, 2013 200.0 201.9 200.0 199.6
---------------------------------------------------------------
420.0 419.1 420.0 416.2
Less: Current maturities 120.0 119.0 - -
---------------------------------------------------------------
Long-term debt $300.0 $300.1 $420.0 $416.2
- ---------------------------------------------------------------------------------------------------------------------
Refer to Note 9 of the Notes to Consolidated Financial Statements for additional
detail.
The Company has not guaranteed any indebtedness of its unconsolidated associated
company.
21
Excluding the impact of increasing raw materials, inflation is considered
insignificant since the rate of inflation has remained relatively low in recent
years and investments in areas of the world where inflation poses a risk are
limited. The impact of increasing raw material costs are discussed under
"Customers and Suppliers" in "Business" in Item 1.
Contractual Obligations and Commercial Commitments
The following table sets forth our contractual obligations as of December 31,
2004:
Payments Due by Period
-------------------------------------------------------------------------
Less Than More than
Contractual Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years
- ------------------------------------------------------------------------------------------------------------
Long-term debt $ 420.0 $120.0 $ 100.0 $ 200.0
Operating leases 45.3 9.1 $ 11.4 5.2 19.6
Purchase obligations 46.6 13.7 16.1 8.8 8.0
Unfunded employee benefits 16.1 1.4 4.1 4.4 6.2
-------------------------------------------------------------------------
Total $ 528.0 $144.2 $ 31.6 $ 118.4 $ 233.8
- ------------------------------------------------------------------------------------------------------------
The Company had net contractual commitments under currency forward contracts in
U. S. dollar equivalent amounts of $35.7, excluding those entered into in
connection with the pending acquisition which are discussed above, that all
settle in less than one year. At December 31, 2004, the Company also had $14.9
of natural gas forward contracts that settle in less than one year. (Refer to
Item 7A included in our Form 10-K as well as Note 4 of the Notes to Consolidated
Financial Statements included herein).
The Company had $25.2 of outstanding letters of credit, surety bonds and bank
guarantees at December 31, 2004 that are issued on the Company's behalf in the
ordinary course of business to support certain performance obligations and
commitments of the Company. The instruments are typically renewed on an annual
basis.
The Company does not have any unconsolidated limited purpose entities or any
undisclosed material transactions or commitments involving related persons or
entities.
22
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets
(Dollars in millions, except per share amounts)
December 31,
2004 2003
- -----------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $323.8 $251.1
Trade accounts receivable, less allowance for doubtful accounts
of
$6.7 and $7.6 in 2004 and 2003, respectively 248.2 217.1
Other accounts receivable 54.1 50.2
Inventories 263.8 209.6
Deferred income taxes 23.3 26.8
Other current assets 29.3 8.8
- -----------------------------------------------------------------------------------------------
Total current assets 942.5 763.6
- -----------------------------------------------------------------------------------------------
Investment in associated companies 85.5 82.1
Plants, equipment and facilities, at cost 1,627.2 1,538.3
Less: accumulated depreciation (948.6) (875.4)
- -----------------------------------------------------------------------------------------------
Net plant investment 678.6 662.9
- -----------------------------------------------------------------------------------------------
Acquisition intangibles, net of accumulated amortization of
$23.1 and $16.6 in 2004 and 2003, respectively 66.8 69.9
Goodwill 342.4 339.7
Deferred income taxes 54.6 54.0
Other assets 81.2 74.2
- -----------------------------------------------------------------------------------------------
Total assets $2,251.6 $2,046.4
- -----------------------------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable $138.1 $93.5
Short-term borrowings - 9.3
Current maturity of long-term debt 119.0 -
Accrued expenses 178.1 170.5
Income taxes payable 61.5 63.2
- -----------------------------------------------------------------------------------------------
Total current liabilities 496.7 336.5
- -----------------------------------------------------------------------------------------------
Long-term debt 300.1 416.2
Pension and other postretirement benefit liabilities 348.3 345.0
Other noncurrent liabilities 174.5 172.8
Stockholders' equity
Preferred stock, 20,000,000 shares authorized; issued and
outstanding 0 and 4,000 shares at 2004 and 2003, respectively,
Series C Cumulative, $.01 par value; liquidation value of $25 per
share - 0.1
Common stock, $.01 par value per share, 150,000,000 shares
authorized;
issued 48,132,640 shares 0.5 0.5
Additional paid-in capital 122.8 122.2
Retained earnings 1,108.5 1,003.4
Accumulated other comprehensive income (loss):
Unearned compensation (3.1) (5.3)
Minimum pension liability (108.5) (96.8)
Unrealized net (losses) gains on cash flow hedges (0.5) 0.3
Accumulated translation adjustments 73.3 38.0
- -----------------------------------------------------------------------------------------------
(38.8) (63.8)
Treasury stock, at cost, 8,297,863 shares in 2004 and 9,139,897
shares in 2003 (261.0) (286.5)
- -----------------------------------------------------------------------------------------------
Total stockholders' equity 932.0 775.9
- -----------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $2,251.6 $2,046.4
- -----------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
23
Consolidated Statements of Income
(Dollars in millions, except per share amounts)
Years ended December 31,
--------------------------------------
2004 2003 2002
- ----------------------------------------------------------------------------------------------------
Net sales $1,721.3 $1,471.8 $1,346.2
Manufacturing cost of sales 1,303.1 1,111.9 1,021.4
Selling and technical services 139.8 126.9 122.6
Research and process development 40.0 35.2 33.7
Administrative and general 65.1 49.7 47.0
Amortization of acquisition intangibles 5.6 4.0 3.1
- ----------------------------------------------------------------------------------------------------
Earnings from operations 167.7 144.1 118.4
Other income (expense), net 16.9 (5.7) 1.2
Equity in earnings of associated companies 5.2 7.2 6.1
Interest expense, net 17.4 16.2 16.5
- ----------------------------------------------------------------------------------------------------
Earnings before income taxes and cumulative effect of
accounting change 172.4 129.4 109.2
Income tax provision 41.4 36.6 30.5
- ----------------------------------------------------------------------------------------------------
Earnings before cumulative effect of accounting change 131.0 92.8 78.7
Cumulative effect of accounting change, net of taxes of $7.3 - (13.6) -
- ----------------------------------------------------------------------------------------------------
Net earnings 131.0 79.2 78.7
Premium paid to redeem preferred stock 9.9 - -
- ----------------------------------------------------------------------------------------------------
Net earnings available to common stockholders $121.1 $79.2 $78.7
- ----------------------------------------------------------------------------------------------------
Basic earnings per common share:
Net earnings available to common stockholders before
cumulative effect of accounting change $3.06 $2.38 $1.99
Cumulative effect of accounting change - (0.35) -
- ----------------------------------------------------------------------------------------------------
Net earnings available to common stockholders $3.06 $2.03 $1.99
- ----------------------------------------------------------------------------------------------------
Diluted earnings per common share:
Net earnings available to common stockholders before
cumulative effect of accounting change $2.96 $2.31 $1.94
Cumulative effect of accounting change - (0.34) -
- ----------------------------------------------------------------------------------------------------
Net earnings available to common stockholders $2.96 $1.97 $1.94
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Dividends per common share $0.40 - -
- ----------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
24
Consolidated Statements of Cash Flows
(Dollars in millions)
Years ended December 31,
---------------------------------------
2004 2003 2002
- --------------------------------------------------------------------------------------------------------
Cash flows provided by (used in) operating activities
Net earnings $131.0 $79.2 $78.7
Noncash items included in net earnings:
Dividends from associated companies less than earnings (2.6) (1.8) (5.5)
Depreciation 86.6 85.9 81.5
Amortization 12.2 7.7 2.2
Deferred income taxes 19.6 15.7 27.5
Loss on asset write-off - - 7.2
Unrealized net gains on derivative instruments (7.9) - -
Gain on sale of assets - - (1.2)
Cumulative effect of accounting change, net of taxes - 13.6 -
Other 0.7 (0.5) 0.5
Changes in operating assets and liabilities (excluding effect of
acquisitions):
Trade accounts receivable (24.1) 13.6 (12.5)
Other receivables (2.0) (7.9) (4.1)
Inventories (46.8) (15.2) 22.9
Accounts payable 36.5 (13.4) 20.7
Accrued expenses (7.3) (8.6) 19.3
Income taxes payable 7.9 9.2 9.4
Other assets 0.4 (1.1) (4.6)
Other liabilities (36.8) (44.0) (30.4)
- --------------------------------------------------------------------------------------------------------
Net cash flows provided by operating activities 167.4 132.4 211.6
- --------------------------------------------------------------------------------------------------------
Cash flows provided by (used in) investing activities
Additions to plants, equipment and facilities (89.3) (93.8) (62.2)
Proceeds received on sale of assets 0.7 0.1 6.3
Business acquisition costs (4.6) - -
Acquisition of product lines, net of cash received - (101.6) -
Advance payment received on land lease 9.1 - -
Investment in unconsolidated affiliates - - (0.5)
- --------------------------------------------------------------------------------------------------------
Net cash used in investing activities (84.1) (195.3) (56.4)
- --------------------------------------------------------------------------------------------------------
Cash flows provided by (used in) financing activities
Proceeds from the exercise of stock options and warrants 24.6 14.5 3.1
Purchase of treasury stock (13.1) (27.7) (32.7)
Cash dividends (15.7)
Redemption of Series C preferred stock (10.0)
Change in short term borrowings (9.3) (0.3) -
Payments of long-term debt - (100.0) -
Proceeds from long-term debt - 198.9 -
Proceeds from termination of interest rate swap 2.9
Proceeds received on sale of put options - - 0.3
Repayment of seller-financed debt - - (7.4)
- --------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (20.6) 85.4 (36.7)
- --------------------------------------------------------------------------------------------------------
Effect of currency rate changes on cash and cash equivalents 10.0 18.6 7.9
- --------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 72.7 41.1 126.4
Cash and cash equivalents, beginning of year 251.1 210.0 83.6
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $323.8 $251.1 $210.0
- --------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
25
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2004, 2003 and 2002
(Dollars in millions)
Accumulated other comprehensive income (loss)
---------------------------------------------------
Unrealized net
Additional (losses)gains
Additional Unearned Minimum on Accumulated
Preferred Common Paid-in Retained Compen- Pension Derivative Translation Treasury
Stock Stock Capital Earnings sation Liability Instruments Adjustment Stock Total
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 2001 $0.1 $0.5 $136.7 $ 826.2 $(4.0) $(5.4) $0.0 $(46.5) $(270.7) $636.9
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative effect as of
January 1, 2002 of the
retroactive application
of a change from the
LIFO method of
inventory valuation -- -- -- 19.3 -- -- -- -- -- 19.3
Net earnings -- -- -- 78.7 -- -- -- -- -- $78.7
Other comprehensive
income:
Minimum pension
liability
adjustment, net of
taxes of $46.7 -- -- -- -- -- (92.6) -- -- -- (92.6)
Translation
adjustments -- -- -- -- -- -- -- 27.7 -- 27.7
---------
Comprehensive income $13.8
Award of, and changes
in,
performance &
restricted stock -- -- (1.5) -- (1.5) -- -- -- 3.4 0.4
Amortization of
performance
& restricted stock -- -- -- -- (1.3) -- -- -- -- (1.3)
Purchase of treasury
stock -- -- -- -- -- -- -- -- (32.7) (32.7)
Exercise of stock
options -- -- (6.2) -- -- -- -- -- 9.3 3.1
Premiums received on
sales
of put options -- -- 0.3 -- -- -- -- -- -- 0.3
Tax benefit on stock
options -- -- 1.8 -- -- -- -- -- -- 1.8
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 2002 $0.1 $0.5 $131.1 $924.2 $(6.8) $(98.0) $0.0 $(18.8) $(290.7) $641.6
- ---------------------------------------------------------------------------------------------------------------------------------
Net earnings -- -- -- 79.2 -- -- -- -- -- $79.2
Other comprehensive
income:
Minimum pension
liability
adjustment, net of
taxes of $2.4 -- -- -- -- -- 1.2 -- -- -- 1.2
Unrealized net gains
on
derivative
instruments -- -- -- -- -- -- 0.3 -- -- 0.3
Translation
adjustments -- -- -- -- -- -- -- 56.8 -- 56.8
---------
Comprehensive income $137.5
Award of, and changes
in,
performance &
restricted stock -- -- 2.3 -- (0.4) -- -- -- (1.7) 0.2
Amortization of
performance
& restricted stock -- -- -- -- 1.9 -- -- -- -- 1.9
Purchase of treasury
stock -- -- -- -- -- -- -- -- (27.7) (27.7)
Exercise of stock
options -- -- (19.1) -- -- -- -- -- 33.6 14.5
Tax benefit on stock
options -- -- 7.9 -- -- -- -- -- -- 7.9
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 2003 $0.1 $0.5 $122.2 $1,003.4 $(5.3) $(96.8) $0.3 $ 38.0 $(286.5) $ 775.9
- ---------------------------------------------------------------------------------------------------------------------------------
Net earnings -- -- -- 131.0 -- -- -- -- -- $131.0
Other comprehensive
income:
Minimum pension
liability
adjustment, net of
taxes of $17.6 -- -- -- -- -- (11.7) -- -- -- (11.7)
Unrealized net losses
on
derivative
instruments -- -- -- -- -- (0.8) -- -- (0.8)
Translation
adjustments -- -- -- -- -- -- -- 35.3 -- 35.3
---------
Comprehensive income $153.8
Award of, and changes
in,
performance &
restricted stock -- -- 2.6 -- (2.4) -- -- -- 0.3 0.5
Amortization of
performance
& restricted stock -- -- -- -- 4.6 -- -- -- -- 4.6
Purchase of treasury
stock -- -- -- -- -- -- -- -- (13.1) (13.1)
Redemption of preferred
stock (0.1) -- -- (9.9) -- -- -- -- -- (10.0)
Dividends:
Common stock
outstanding -- -- -- (15.7) -- -- -- -- -- (15.7)
Deferred and unvested
common
stock -- -- -- (0.3) -- -- -- -- -- (0.3)
Exercise of stock
options -- -- (13.7) -- -- -- -- -- 38.3 24.6
Tax benefit on stock
options -- -- 11.7 -- -- -- -- -- -- 11.7
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 2004 -- $0.5 $122.8 $1,108.5 $(3.1) $(108.5) $(0.5) $ 73.3 $(261.0) $ 932.0
- ---------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts, unless otherwise indicated).
1. SUMMARY OF ACCOUNTING POLICIES
A. Nature of Business and Consolidation Policy: The Company is a global
specialty chemicals and specialty materials company that focuses on value-added
products. The Company serves major markets for aerospace, automotive and
industrial coatings, chemical intermediates, mining, plastics and water
treatment. The Company has manufacturing facilities in ten countries and sells
its products worldwide. The consolidated financial statements include the
accounts of the Company and its subsidiaries on a consolidated basis.
Intercompany transactions and balances have been eliminated. The equity method
of accounting is used for investments in associated companies that the Company
does not control, but for which the Company has the ability to exercise
significant influence on operating and financial policy. Certain
reclassifications have been made to prior years' consolidated financial
statements in order to conform to the current year's presentation.
B. Inventories: Inventories are carried at the lower of cost or market.
Effective January 1, 2005, the Company changed its inventory costing method for
U.S. inventories from the last-in, first-out ("LIFO") method to the first-in,
first-out ("FIFO") method. Management of the Company believes that the FIFO
method is preferable to LIFO because FIFO inventory values presented in the
Company's consolidated balance sheet will more accurately reflect the current
value of inventory and the change to FIFO for U.S. inventories results in the
Company using a uniform method of inventory valuation globally.
The Company has applied this change retroactively by restating its
consolidated financial statements as required by Accounting Principles Board No.
20, "Accounting Changes," and accordingly, previously reported amounts in the
accompanying consolidated financial statements and the related information in
the notes herein have been restated for all periods presented. As a result of
this change, inventories at December 31, 2004 were increased by $41.7, retained
earnings were increased by $25.4 and deferred income tax assets were decreased
by $16.3. The table below shows the effects on net earnings and earnings per
share for the years ended December 31, 2004, 2003 and 2002 as a result of the
retroactive restatement of the financial statements related to the change in
accounting principle:
2004 2003 2002
- ------------------------------------------------- --------- --------- ----------
Net earnings available to common stockholders $ 4.9 $ 1.8 $ (0.6)
Basic earnings per common share $ 0.12 $ 0.04 $ (0.02)
Diluted earnings per common share $ 0.12 $ 0.04 $ (0.02)
- ------------------------------------------------- --------- --------- ----------
C. Currency Translation: Operations in non-U. S. subsidiaries are recorded in
local currencies which are also the functional currencies for financial
reporting purposes. The results of operations for non-U. S. subsidiaries are
translated from local currencies into U. S. dollars using the average currency
rate during each period which approximates the results that would be obtained
using actual currency rates on the dates of individual transactions. Assets and
liabilities are translated using currency rates at the end of the period with
translation adjustments recorded in accumulated translation adjustments and
recognized as a component of other comprehensive income. Transaction gains and
losses are recorded as incurred in other income (expense), net in the
Consolidated Statements of Income.
D. Depreciation: Depreciation in the United States and Canada is provided
primarily on a straight-line composite method over the estimated useful lives of
various classes of assets, with rates periodically reviewed and adjusted if
necessary. When such depreciable assets are sold or otherwise retired from
service, their costs plus demolition costs less amounts realized on sale or
salvage are charged or credited to the accumulated depreciation account. The
average composite depreciation rates, expressed as a percentage of the average
depreciable property in service, were 5.8% in 2004, 6.1% in 2003 and 6.4% in
2002. Depreciation for assets outside the United States and Canada is provided
on a straight-line basis over the estimated useful lives of the assets.
Expenditures for maintenance and repairs are charged to current operating
expenses. Acquisitions, additions and betterments, either to provide necessary
capacity, improve the efficiency of production units, modernize or replace older
facilities or to install equipment for protection of the environment, are
capitalized. The Company capitalizes interest costs incurred during the period
of construction of plants and equipment.
E. Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed:
Long-lived assets and intangible assets with determinable useful lives are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
the assets to the future undiscounted net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets and would be charged to earnings. Assets to
be disposed of are reported at the lower of the carrying amount or fair value
less the costs to sell. Intangible assets are amortized over their respective
estimated useful lives.
27
F. Goodwill: The Company adopted SFAS No. 142 effective January 1, 2002. The
Company has defined its product line segments as its SFAS 142 reporting units.
The Company tests goodwill for impairment on an annual basis in its fourth
fiscal quarter. Goodwill of a reporting unit will be tested for impairment
between annual tests if events occur or circumstances change that would likely
reduce the fair value of the reporting unit below its carrying value. The
Company uses a two-step process to test goodwill for impairment. First, the
reporting units' fair value is compared to its carrying value. The Company
utilizes a market multiple approach to determine fair value estimates. Due to
the cyclical nature of the Company's reporting units, market multiple values are
determined utilizing a three-year average. The three-year period is comprised of
the prior year, current year and one year of projected amounts. If the market
multiple approach yields a result, which may indicate a possible impairment, a
discounted cash flow approach is utilized to more precisely determine the
reporting units' fair value. If a reporting unit's carrying amount exceeds its
fair value, an indication exists that the reporting unit's goodwill may be
impaired, and the second step of the impairment test would be performed. The
second step of the goodwill impairment test is used to measure the amount of the
impairment loss. In the second step, the implied fair value of the reporting
unit's goodwill is determined by allocating the reporting unit's fair value to
all of its assets and liabilities other than goodwill in a manner similar to a
purchase price allocation. The resulting implied fair value of the goodwill that
results from the application of this second step is then compared to the
carrying amount of the goodwill and an impairment charge would be recorded for
the difference.
G. Cash and Cash Equivalents: Securities with maturities of three months or less
when purchased are considered to be cash equivalents.
H. Financial Instruments: Financial instruments reflected in the Consolidated
Balance Sheets are recorded at cost which approximates fair value for cash and
cash equivalents, accounts receivable, certain other assets, accounts payable,
and certain other liabilities. Fair values are determined through a combination
of management estimates and information obtained from third parties using the
latest available market data. Long-term debt is carried at amortized cost.
The Company uses derivative instruments in accordance with
Company-established policies to manage exposure to fluctuations in currency
rates, certain commodity (e.g., natural gas) prices, interest rates and equity
prices. Derivative instruments currently utilized by the Company include
currency forward contracts, natural gas forward contracts and swaps, and
interest rate swaps. The Company does not hold or issue derivative financial
instruments for trading or speculative purposes. In conjunction with the pending
acquisition of the Surface Specialties business ("Surface Specialties") of UCB
S.A. ("UCB"), the Company entered into certain interest rate swap and foreign
currency derivatives during the fourth quarter of 2004. Changes in the fair
value of these contracts were recorded in other income (expense), net (Refer to
Note 2). The Company enters into financial instrument transactions with either
major financial institutions or highly-rated counterparties and makes reasonable
attempts to diversify transactions among counterparties, thereby limiting
exposure to credit related and performance related risks.
The Company periodically enters into currency forward contracts primarily
to hedge currency fluctuations of transactions denominated in currencies other
than the functional currency of the business. The principal transactions hedged
involve accounts receivable, accounts payable and intercompany loans. When
hedging currency exposures, the Company's practice is to hedge such exposures
with forward contracts denominated in the same currency and with similar
critical terms as the underlying exposure, and therefore, the instruments are
effective at generating offsetting changes in the fair value, cash flows or
future earnings of the hedged item or transaction.
Currency forward contracts are reported as either assets or liabilities on
the consolidated balance sheets with changes in their fair value recorded in
other income (expense), net, together with the offsetting gain or loss on the
hedged asset or liability. To the extent that the Company's strategy for
managing currency risk changes, including the use of derivative instruments
other than forward contracts or hedging other than recognized assets or
liabilities, the accounting methods used to record those transactions may differ
from the policies described above.
The Company uses natural gas forward contracts, which are physically
settled, to hedge certain utility requirements. The maturities of these
contracts correlate highly to the actual purchases of the commodity and have the
effect of securing predetermined prices that the Company pays for the underlying
commodity. While these contracts are structured to limit the Company's exposure
to increases in commodity prices, they can also limit the potential benefit the
Company might have otherwise received from decreases in commodity prices.
Because the Company takes physical delivery of the commodity, these contracts
are not required to be recognized on the balance sheet at fair value. Instead,
realized gains and losses are included in the cost of the commodity upon
settlement of the contract.
The Company also uses natural gas swaps, which are financially settled, to
hedge utility requirements at certain of its other facilities. These swaps,
which are highly effective at achieving offsetting cash flows of the underlying
28
natural gas purchases, have been designated as cash flow hedges and are reported
on the consolidated balance sheets at fair value, with offsetting amounts
included in unrealized net (losses) gains on cash flow hedges on an after-tax
basis. Gains and losses are reclassified into earnings, as a component of
manufacturing cost of sales in the period the hedged natural gas purchases
affect earnings.
I. Environmental and Other Contingent Liabilities: Accruals for environmental
remediation, maintenance and operating costs directly related to remediation,
and other contingent liabilities are recorded when it is probable that a
liability has been incurred and the amount of the liability can be reasonably
estimated. The amount accrued for environmental remediation reflects the
Company's assumptions about remediation requirements at the contaminated site,
the nature of the remedy, the outcome of discussions with regulatory agencies
and other potentially responsible parties at multi-party sites, and the number
and financial viability of other potentially responsible parties. As assessments
and cleanups proceed, these accruals are reviewed periodically and adjusted, if
necessary, as additional information becomes available. These accruals can
change substantially due to such factors as additional information on the nature
or extent of contamination, methods of remediation required, changes in the
apportionment of costs among responsible parties and other actions by
governmental agencies or private parties.
Accruals for environmental liabilities are recorded as other non-current
liabilities with any amounts expected to be paid out in the next twelve months
classified as current liabilities at undiscounted amounts and exclude claims for
recoveries from insurance companies or other third parties. In those cases where
insurance carriers or third-party indemnitors have agreed to pay any amounts and
management believes that collectability of such amounts is probable, the
undiscounted amounts are recorded as receivables in the consolidated financial
statements. Other contingent liabilities are recorded at undiscounted amounts as
other non-current liabilities with any amounts expected to be paid out in the
next twelve months classified as current liabilities.
Environmental compliance costs are capitalized and depreciated if they
extend the life of the related equipment, increase its capacity, and/or mitigate
or prevent future contamination.
It is the Company's practice to conduct an analysis of its self-insured and
insured contingent liabilities annually and whenever circumstances change
significantly. Included in these liabilities are workers' compensation, product
liability and toxic tort claims. Future indemnity costs are recorded at
management's best estimate of the ultimate expected liabilities, without any
discount to reflect the time value of money. The gross indemnity costs are
recorded as other non-current liabilities with any amounts expected to be paid
out in the next twelve months classified as current liabilities. Probable
insurance recoveries for past and future indemnity costs are recorded at
management's best estimate of the ultimate expected receipts without discounting
to reflect the time value of money. Defense and processing costs are expensed as
incurred. Probable insurance recoveries for defense and processing costs relate
only to actual costs incurred.
J. Income Taxes: Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis and operating loss and tax credit carryforwards. A valuation allowance is
provided when it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in earnings in the period that includes the enactment date.
If repatriation of the undistributed earnings of the Company's international
subsidiaries and associated companies is anticipated then income taxes are
provided for such earnings.
K. Postretirement Benefits: Costs are recognized as employees render the
services necessary to earn the related benefits.
L. Revenue Recognition: The Company recognizes revenue when persuasive evidence
of an arrangement exists, the selling price is fixed or determinable, collection
is reasonably assured and title and risk of loss has passed to its customers.
M. Earnings Per Share: Basic earnings per common share excludes dilution and is
computed by dividing net earnings available to common stockholders by the
weighted-average number of common shares outstanding (which includes shares
outstanding less performance and restricted shares for which vesting criteria
have not been met) plus deferred stock awards, weighted for the period
outstanding. Diluted earnings per common share is computed by dividing net
earnings available to common stockholders by the sum of the weighted-average
number of common shares outstanding for the period adjusted (i.e., increased)
for all additional common shares that would have been outstanding if potentially
dilutive common shares had been issued and any proceeds of the issuance had been
used to repurchase common stock at the average market price during the period.
The proceeds used to repurchase common stock are assumed to be the sum of the
amount to be paid to the Company upon exercise of options, the amount of
compensation cost attributed to future services and not yet recognized and the
amount of income taxes that would be credited to or deducted from capital upon
exercise. Preferred stock dividends were paid on preferred shares through the
date at which it was redeemed.
29
In calculating basic and diluted earnings available to common stockholders
per share, there are no adjustments to income (the numerator) other than the
premium paid to redeem preferred stock of $9.9 in 2004. The following shows the
reconciliation of the weighted average shares (the denominator) used in the
calculation of diluted earnings per share:
December 31 2004 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding: 39,548,312 38,957,611 39,469,995
Effect of dilutive shares:
Options 1,148,311 1,082,652 884,337
Performance/Restricted Stock 133,328 118,413 150,287
Warrants - - 625
Put Options - - 7,055
- ----------------------------------------------------------------------------------------------------------------------
Adjusted average shares outstanding 40,829,951 40,158,676 40,512,299
- ----------------------------------------------------------------------------------------------------------------------
Stock options to purchase 407,450, 1,328,100 and 3,058,837 shares of common
stock at a weighted-average price per share of $48.10, $43.25 and $35.82 were
outstanding during 2004, 2003 and 2002, respectively, but excluded from the
above calculation because their inclusion would have had an anti-dilutive effect
on earnings per share.
N. Stock-Based Compensation: At December 31, 2004, the Company has stock-based
employee compensation plans, which are described more fully in Note 14. The
Company accounts for its stock based compensation under the recognition and
measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB No. 25") and related
Interpretations. No stock-based compensation cost is reflected in net earnings
for stock options, as all options granted under those plans had an exercise
price equal to the market value of the underlying common stock on the date of
the grant. Compensation cost for restricted stock is recorded based on the
market value on the date of grant, and compensation cost for performance stock
is recorded based on the quoted market price of the Company's common stock at
the end of each period through the date of vesting. The fair value of restricted
and performance stock is charged to unearned compensation in Stockholders'
Equity and amortized to expense over the requisite vesting periods.
The following table illustrates the pro forma effect on net earnings
available to common stockholders and net earnings available to common
stockholders per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123") to stock-based employee compensation:
2004 2003 2002
- --------------------------------------------------------------------
Net earnings available to common
stockholders, as reported $121.1 $79.2 $78.7
Add (Deduct): Stock-based employee
compensation expense (income)
included in reported net income,
net of related tax effects 3.0 1.3 (0.8)
Deduct: Total stock-based
employee compensation
expense determined under fair
value based method for all
awards, net of related tax effects 7.1 7.8 6.4
- --------------------------------------------------------------------
Pro forma net earnings available to
common stockholders $117.0 $72.7 $71.5
- --------------------------------------------------------------------
Net earnings available to common
stockholders per share:
Basic, as reported $3.06 $2.03 $1.99
Basic, pro forma $2.96 $1.87 $1.81
Diluted, as reported $2.96 $1.97 $1.94
Diluted, pro forma $2.87 $1.81 $1.76
- --------------------------------------------------------------------
30
The fair value of each grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
2004 2003 2002
- ---------------------------------------------------------------------
Expected life (years) 5.7 5.6 5.6
Expected volatility 46.6% 47.3% 47.4%
Expected dividend yield 1.0% - -
Risk-free interest rate 3.4% 2.9% 3.3%
Weighted average fair
value of options granted
during the year $16.21 $12.69 $11.65
-------------------------------------------------------------------
O. Newly Issued and Adopted Accounting Pronouncements: In December, 2004, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (revised
2004), "Share-Based Payment" ("SFAS 123R"). SFAS 123R addresses the accounting
for transactions in which an enterprise receives employee services in exchange
for (a) equity instruments of the enterprise or (b) liabilities that are based
on the fair value of the enterprise's equity instruments or that may be settled
by the issuance of such equity instruments. SFAS 123R supersedes APB No. 25 and
requires that such transactions be accounted for using a fair-value based
method. SFAS 123R requires companies to recognize an expense for compensation
cost related to share-based payment arrangements including stock options and
employee stock purchase plans. The Company is required to implement the proposed
standard no later than July 1, 2005. The cumulative effect of adoption, applied
on a modified prospective basis, would be measured and recognized on January 1,
2005. The Company is currently evaluating option valuation methodologies and
assumptions related to its stock compensation plans. Current estimates of option
values using the Black-Scholes method may not be indicative of results from
valuation methodologies ultimately adopted.
In December, 2004, the FASB issued FASB Staff Position 109-2, "Accounting
and Disclosure Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004" ("FSP 109-2"), in response to the
American Jobs Creation Act of 2004 which was signed into law in October, 2004
and which provides for a special one-time tax deduction of 85% of certain
foreign earnings that are repatriated (as defined). Based on the Company's
decision to reinvest rather than to repatriate current and prior year's
unremitted foreign earnings, the application of FSP 109-2 did not affect income
tax expense in the period of enactment or any related disclosures.
In November, 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 is the result of a
broader effort by the FASB to improve the comparability of cross-border
financial reporting by working with the International Accounting Standards Board
("IASB") toward development of a single set of high-quality accounting
standards. The FASB and the IASB noted that ARB 43, Chapter 4 and IAS 2,
"Inventories," require that abnormal amounts of idle freight, handling costs,
and wasted materials be recognized as period costs, however, the Boards noted
that differences in the wording of the two standards could lead to inconsistent
application of those similar requirements. The FASB concluded that clarifying
the existing requirements in ARB 43 by adopting language similar to that used in
IAS 2 is consistent with its goals of improving financial reporting in the
United States and promoting convergence of accounting standards internationally.
Adoption of SFAS 151 is required for fiscal years beginning after June 15, 2005.
The provisions of SFAS 151 will be applied prospectively. The Company is
currently in the process of evaluating the impact that SFAS 151 will have on the
results of operations and financial position of the Company.
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act") was signed into law. The Act introduces a
federal subsidy to sponsors of retiree healthcare benefit plans that provide a
benefit that is at least actuarially equivalent to Medicare. The Company adopted
the provisions of FASB Staff Position 106-2 ("FSP 106-2"), "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003" in the third quarter of 2004, retroactive to
January 1, 2004, as allowed. FSP 106-2 requires companies to account for the
reduction in accumulated postretirement benefit obligation (APBO) as an
actuarial gain to be amortized into earnings over the average remaining service
period of plan participants. In accordance with FSP 106-2, the Company recorded
a reduction in the net periodic benefit cost of $2.4 for the year ended December
31, 2004.
The adoption of FSP 106-2 resulted in a reduction of the Company's APBO of
approximately $31.7, which the Company recognized as a reduction in unrecognized
net actuarial loss. This reduction in the APBO results from an ongoing tax-free
government subsidy beginning in 2006, for prescription benefits provided to plan
participants if such benefits are determined to be actuarially equivalent to
those offered by Medicare. Based on the current guidance of determining
actuarial equivalence, the Company has been able to determine that some of the
plan participants qualify for the subsidy. The Company amortizes the
unrecognized net actuarial loss over the average remaining service life of
employees eligible for postretirement benefits. The service cost, interest cost
and net amortization components of net postretirement benefit cost were reduced
by $0.0, $2.0 and $0.4, respectively, for the year ended December 31, 2004.
31
P. Accounting Pronouncement Adopted in Prior Year: On January 1, 2003, the
Company adopted SFAS No. 143, "Accounting for Asset Retirement Obligations"
("SFAS 143") that addresses the financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The standard applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and/or normal use of an asset. SFAS 143
requires that the fair value of the liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The present value of the liability is added to the
carrying amount of the associated asset and this additional carrying amount is
depreciated over the life of the asset. The liability is accreted at the end of
each period through charges to operating expense. If the obligation is settled
for other than the carrying amount of the liability the Company will recognize a
gain or loss on settlement.
On January 1, 2003, as a result of the adoption of SFAS 143, the Company
recorded an increase in Other non-current liabilities of $22.8, an increase in
the gross carrying value of plants, equipment and facilities of $5.3 and related
accumulated depreciation of approximately $3.4, a long-term deferred tax asset
of $7.3 and an after tax charge of $13.6 for the cumulative effect of prior
years for depreciation of the additional costs and accretion expense on the
asset retirement liability. The other non-current liability relates primarily to
estimated costs for disposal of building materials and other closure obligations
for existing structures upon renovation, closure or dismantlement of certain of
the Company's facilities. At December 31, 2004 and 2003, the asset retirement
liability was $22.3 and $23.1, respectively. Accretion and depreciation expense
for both the years ended December 31, 2004 and 2003 was $1.8. The pro forma
amount of the asset retirement liability as of December 31, 2002 was $22.8. The
pro forma amounts of the asset retirement liability were measured using
information, assumptions and interest rates as of the adoption date of January
1, 2003. Pro forma net earnings available to common stockholders, basic earnings
available to common stockholders per share and diluted earnings available to
common stockholders per share for the year ended December 31, 2002, assuming
SFAS 143 had been applied as of January 1, 2002, are $77.6, $1.97 and $1.92,
respectively.
Q. Risks and Uncertainties: The Company is engaged primarily in the manufacture
and sale of a highly diversified line of specialty chemical products and
specialty materials throughout the world. The Company's revenues are dependent
on the continued operation of its various manufacturing facilities. The
operation of manufacturing plants involves many risks, including the breakdown,
failure or substandard performance of equipment, natural disasters, terrorist
acts, and the need to comply with directives of governmental agencies. The
occurrence of operational problems, including but not limited to the above
events, may have a materially adverse effect on the productivity and
profitability of a particular manufacturing facility, or with respect to certain
facilities, the Company as a whole during the period of such operational
difficulties.
The Company's operations are also subject to various hazards incidental to
the production, use and sale of industrial chemicals, including the use,
handling, processing, storage and transportation of certain hazardous materials.
These hazards can cause personal injury and loss of life, severe damage to and
destruction of property and equipment, environmental damage and suspension of
operations. Claims arising from any future catastrophic occurrence involving the
Company may result in the Company being named as a defendant in lawsuits
potentially asserting large claims.
The Company performs ongoing credit evaluations of its customers' financial
condition and generally requires no collateral from its customers. The Company
is exposed to credit losses in the event of nonperformance by counterparties on
derivative instruments. The counterparties to these transactions are major
financial institutions, thus the Company considers the risk of default to be
minimal. The Company does not require collateral or other security to support
the financial instruments with credit risk.
International operations are subject to various risks which may not be
present in United States operations, including political instability, the
possibility of expropriation, restrictions on royalties, dividends and
remittances, instabilities of currencies, requirements for governmental
approvals for new ventures and local participation in operations such as local
equity ownership and workers' councils. The Company does not believe that it is
likely to suffer a material adverse effect on its results of operations in
connection with its existing international operations.
In anticipation of the pending acquisition of Surface Specialties (refer to
Note 2), the Company entered into foreign currency derivative contracts and
forward-starting interest rate swaps to offset potential dollar to euro exchange
rate fluctuations and market interest rate volatility that would have an impact
on the acquisition cost in dollars and financing costs. Volatility in exchange
and interest rates, through the period these financial instruments are
outstanding, could result in significant mark-to-market adjustments that would
impact earnings.
R. Use of Estimates: Financial statements prepared in conformity with accounting
principles generally accepted in the United States require management to make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and revenue and expenses and pro forma compensation expense
32
during the period reported. Actual results could differ from those estimates.
Estimates are used for, but not limited to: allowance for doubtful accounts,
inventory valuations, useful lives of tangible and intangible assets,
recoverability of goodwill, accrued expenses, environmental and other contingent
liabilities, pension and other postretirement benefits, income tax valuation
allowances and assumptions utilized within the Black-Scholes options pricing
model and the model itself. Accounting estimates require the use of judgment
regarding uncertain future events and their related effects and, accordingly,
may change as additional information is obtained.
2. ACQUISITIONS AND DISPOSITIONS
2004 Activity: On October 1, 2004, the Company announced that it had signed
a definitive agreement to purchase the Surface Specialties business of UCB, a
Belgium biopharmaceutical and specialty chemical company, for cash and stock,
valued at that time, of 1.5 billion euros. In early February 2005, the Company
reached agreement with UCB to modify the terms of the purchase agreement.
Assuming the dollar to euro exchange rate is 1.3 to 1 and Cytec common stock is
$51 per share, the transaction would be valued at $1.841 billion of which 1.140
billion euros ($1.482 billion) will be paid in cash and the balance will be paid
in 5,772,857 shares of Cytec common stock ($294 million). In addition, there is
contingent consideration up to a maximum of 50 million euros ($65.0), of which
20 million euros ($26.0) will be paid up front with the balance payable in 2006.
The contingent consideration will be earned on a pro-rata basis pending the
achievement of certain operating results by Surface Specialties in 2005. UCB
also agreed to reimburse Cytec 15 million euros ($19.5) for transaction related
costs. The acquisition is subject to customary closing conditions including the
approval of the U.S. Federal Trade Commission. The Company anticipates closing
on this transaction in the first quarter of 2005.
Upon closing, UCB would own approximately 12% of the outstanding shares of
Cytec and will enter into a stockholders agreement that will provide that UCB
must reduce its stake to less than 9% within three years, less than 7% within
four years and less than 5% within five years and that will contain other
customary terms and provisions.
At closing, the Company expects to finance the cash portion of the
acquisition with combined bank borrowings of approximately $1,320.0 under the
two acquisition related credit facilities that were executed on February 15,
2005 and approximately $200.0 of available cash balances. Approximately $600.0
of the bank debt will be refinanced on a long-term basis in the public debt
markets after the acquisition.
The acquisition complements Cytec's existing product lines by
significantly increasing Cytec's product offering to the coatings industries
including the general industrial, automotive, architectural, plastic, graphic
arts and wood sectors.
The global Surface Specialties business had sales and earnings before
interest, taxes and depreciation, prepared in accordance with accounting
principles generally accepted in Belgium and which are unaudited, of 1.112
billion euros and 147 million euros, respectively, ($1.446 billion and $191.0,
respectively, at 1.3 US dollar per euro) in 2004.
Cytec intends to operate the Surface Specialties business as a separate
segment and will integrate its coatings chemicals and performance chemicals
product lines into the new segment.
Surface Specialties also has a significant amino resins business. The
Company has agreed with the European Union Commission, and expects to reach a
similar agreement with the U.S. Federal Trade Commission, that it will divest
UCB's amino resins business after it purchases Surface Specialties and that
prior to the divestment, Surface Specialties amino resins business will be held
separately and will report to an independent trustee. After the transaction is
consummated, for the duration that the amino resins business is owned by Cytec,
its results of operations will be classified as results from discontinued
operations on Cytec's consolidated statements of income. The Company will use
the proceeds to reduce debt. Sales of Surface Specialties' amino resin product
line, prepared in accordance with accounting principles generally accepted in
Belgium and which are unaudited in 2004, were approximately $150.0.
Through February 16, 2005, the Company has entered into $623.2 of
forward-starting interest rate swaps to hedge the benchmark interest rate and
credit spread on a portion of the debt that will be issued to finance the
acquisition of Surface Specialties. The weighted-average interest rate of 4.69%
for the U.S dollar swaps includes the current swap credit spread of
approximately 38 basis points and premium of approximately 3 basis points for
the forward starting element of the swap. The corresponding euro swaps have a
weighted-average interest rate of 3.97% and include the current swap credit
spread of approximately 16 basis points and premium of approximately 1 basis
point for the forward starting element of the swap. The credit spread portions
of the swaps are representative of AA rated 10-year notes and serve as a proxy
credit spread for the Company. The Company's actual credit spread at the time of
debt issuance will be determined primarily based on its actual credit rating and
market conditions. The swaps, which mature in March 2005, are marked to market
and recorded currently in earnings until maturity or settlement. As of February
16, 2005, the Company has hedged approximately 90% of the anticipated portion of
the purchase price that will be refinanced with long-term debt. As of February
16, 2005, the net impact of the marked to market value on these swaps was a loss
of approximately $13.7 of which $6.5 was recorded in 2004.
33
Through February 16, 2005, the Company has entered into foreign currency
forward contracts totaling 1.002 billion euros that relate to approximately 84%
of the euro exposure of 1.190 billion for the cash component of the Surface
Specialties acquisition. The Company has hedged approximately 93% of the
exposure with these forward contracts together with natural hedges of
approximately 100.8 euros. The forward contracts, which mature on February 28,
2005, are marked to market and recorded currently in earnings until settlement
or maturity. As of February 16, 2005, the cumulative impact of the marked to
market adjustment on these forward contracts and certain forward contracts which
were closed during 2004, was a net loss of approximately $8.7. A gain of $33.3
was recorded in 2004 of which $18.9 was realized.
In connection with the acquisition, the Company suspended its stock
buy-back program and does not anticipate making future stock buy-backs for at
least two years following closing in order to maximize funds available for debt
service and other corporate purposes.
The Company has incurred approximately $10.4 of transaction related
expenses which have been capitalized at December 31, 2004 and which are included
in other assets in the accompanying 2004 consolidated balance sheet, of which
$4.6 has been paid as of December 31, 2004.
2003 Transactions: In July 2003, the Company acquired substantially all of
the assets and liabilities of the metal extractant products ("MEP") and
intermediates and stabilizers ("I&S") product lines of Avecia Investments
Limited ("Avecia") for approximately $96.1 in cash, net of cash acquired. The
MEP product line, which had sales in 2002 of approximately $29.0 (unaudited)
broadens the Company's product line for the mining industry with differentiated
technology. This is reported as part of the Cytec Performance Specialties
segment. The I&S product line broadens the Company's customer base and adds new
products and manufacturing technologies. Total sales in 2002 were $36.0
(unaudited). The reporting of the I&S product line is also reported as part of
the Cytec Performance Specialties segment. The custom organo phosphorus product
line of the I&S product line, which accounted for approximately 20% of the sales
in this product line in 2002, is included in the segment.
In conjunction with this acquisition, the Company acquired various working
capital and plant, equipment and facilities and recorded amortizable acquisition
intangibles of $24.4 (technology-based intangibles of $9.1, marketing-related
intangibles of $0.7, and customer-related intangibles of $14.6 with estimated
lives ranging from 12 to 15 years) and goodwill of $8.4. This goodwill is
recorded as part of the Cytec Performance Specialties segment.
In September 2003, the Company dissolved its Mitsui Cytec Ltd ("MCY") joint
venture with Mitsui Chemicals Inc. ("Mitsui"). The joint ventures sales in 2002
were approximately $59.0. The transaction resulted in the recognition of
customer-related amortizable acquisition intangibles of $7.0 and goodwill of
$4.6. This goodwill is recorded as part of the Cytec Surface Specialties
segment.
The result of the transaction was such that the Company now owns 100% of
MCY's coatings resins product line (2002 sales of $22.0) and the associated
assets and liabilities of the product line that includes a manufacturing
facility in Shimonoseki, Japan. This is now reported as part of the Cytec
Surface Specialties segment. Mitsui now owns 100% of the water treatment product
line and the associated assets and liabilities of the product line that includes
a production facility in Mobarra, Japan.
The dissolution of the joint venture occurred as follows. MCY sold the
water treatment business to a separate subsidiary of Mitsui for its fair value
which approximated its net book value of approximately $8.8. No gain or loss
resulted from this transaction. Mitsui's equity interest in MCY was then
purchased by the Company for approximately $11.5 in a two-step process whereby
MCY paid approximately $7.8 and the Company paid approximately $3.7 for the
remainder. The Company assumed the debt of the joint venture of $9.7.
Both 2003 acquisitions have been accounted for under the purchase method of
accounting and the results of operations have been included in the consolidated
financial statements from the date of acquisition.
In early October 2003, the Company sold, for a nominal amount, its
one-third share in PolymerAdditives.com, LLC ("PA.com"). PA.com was a
business-to-business internet joint venture originally formed by the Company, GE
Specialty Chemicals, Inc. and Albemarle Corporation. The Company is now selling
directly to those customers previously handled through the venture. During 2002,
the Company reduced the carrying value of its net investment in this venture to
zero and, accordingly, no gain or loss was realized on the October 2003 sale.
Consolidated results of operations would not have been materially different
if any of the above mentioned acquisitions had occurred on January 1 of the
respective year of acquisition or preceding years. Accordingly, pro forma sales,
net earnings and earnings per share disclosures have not been provided.
34
3. RESTRUCTURING OF OPERATIONS
In 2002 the Company recorded an aggregate restructuring charge of $16.0,
which included the elimination of 135 positions worldwide. The charge was
comprised of the following initiatives: reorganization of the Specialty
Chemicals segments resulting in a reduction of 65 personnel (related to
redundancies in manufacturing of 24, selling effort of 25, administrative of 4,
and research of 12) and a charge of $5.1 for employee related costs; alignment
of the Cytec Engineered Materials segment in connection with reduced demand in
the commercial aerospace industry, resulting in a reduction of 47 manufacturing
related personnel and a charge of $1.6 for employee related costs; closure of
the Woodbridge, NJ, facility, resulting in the elimination of 23 manufacturing
related positions and a charge of $1.6 for employee related and decommissioning
costs; and the discontinuance of a minor unprofitable product line, resulting in
a charge of $7.7 for the write-down of the net book value of the fixed assets
and costs of decommissioning the facility. The restructuring costs were charged
to the Consolidated Statement of Income as follows: manufacturing cost of sales,
$11.6; selling and technical services, $2.6; research and process development,
$1.0 and administrative and general, $0.8. This restructuring was completed in
2004.
Payments related to this restructuring were $0.4 in 2004, $1.5 in 2003 and
$6.3 in 2002.
In addition, during 2002 the Company recorded charges of $0.4 in equity in
earnings of associated companies for its 50% share of restructuring charges
related to CYRO's shutdown of its Niagara Falls, Ontario, Canada facility in
2001.
4. FINANCIAL INSTRUMENTS
At December 31, 2004 and 2003, excluding the currency derivatives entered
into as part of the pending acquisition of Surface Specialties (Refer to Note
2), the currency and net contractual amounts of forward contracts outstanding
translated into U. S. dollar equivalent amounts were as follows:
2004 2003
---------------------------------------------------------------------------------
Buy Buy
Pound Canadian Norwegian Canadian
Sell Euro Sterling Dollar Euro Krone Dollar
------------------------------------------------------------------------------------------------------------
U. S. Dollar $24.2 $1.0 $2.5 $10.1 $ 2.2 $4.5
Euro - 0.9 - - 10.7 -
Norwegian Krone 6.3 - - - - -
Pound Sterling - - - 4.0 1.0 -
Other 0.8 - - 0.8 0.1 -
------------------------------------------------------------------------------------------------------------
The fair value of currency contracts, based on forward exchange rates at
December 31, 2004 and 2003, exceeded contract values by approximately $0.9 and
$0.6, respectively.
At December 31, 2004, the Building Block Chemicals Fortier plants' 2005
forecasted natural gas utility requirements were 51% hedged utilizing natural
gas forward contracts. These contracts totaled $14.9 and have delivery dates
from January 2005 through December 2005. Based on year-end NYMEX prices, the
Company had net unrealized losses and gains on its natural gas forward contracts
at December 31, 2004 and 2003 of $(1.6) and $0.8, respectively.
At December 31, 2004 and 2003, the Company had outstanding natural gas
swaps with a fair value loss of $(0.7) and a fair value gain of $0.3, net of
taxes, respectively.
5. ASSOCIATED COMPANIES
As of December 31, 2004 and 2003, the Company had one associated company,
CYRO a 50% owned joint venture. The associated companies' information below also
includes the results of the former MCY joint venture through September 30, 2003,
the date the joint venture was dissolved (Refer to Note 2) and PA.com through
September 2003, the last effective date of the Company's ownership of the former
joint venture. Equity in earnings of associated companies also excludes the
Company's share of losses of the former PA.com after September 30, 2002 when the
Company recorded a charge of $1.7 in equity in earnings of associated companies
to reduce the carrying value of its net investment to zero following a review of
anticipated future losses.
35
Summarized financial information for the associated companies is as follows:
December 31, 2004 2003 2002
- -------------------------------------------------------------------------------------------------------------------------------
Net sales $316.7 $327.5 $322.0
Gross profit 44.8 56.5 60.5
Earnings before cumulative effect of accounting change - 13.8 14.4
Cumulative effect of adoption of SFAS 143, net of tax - 0.3 -
Net earnings 10.4 13.5 14.4
The Company's equity in earnings of associated companies $5.2 $7.2 $6.1
The Company's equity in cumulative effect of adoption of SFAS 143, net of tax, of
associated companies - $ 0.1 -
Current assets $ 104.4 $ 80.8 $124.2
Noncurrent assets 132.0 138.2 164.5
- -------------------------------------------------------------------------------------------------------------------------------
Total assets 236.4 219.0 288.7
- -------------------------------------------------------------------------------------------------------------------------------
Current liabilities 35.7 22.9 70.4
Noncurrent liabilities 29.7 31.7 32.2
Equity 171.0 164.4 186.1
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity 236.4 219.0 288.7
- -------------------------------------------------------------------------------------------------------------------------------
Company's share of equity $ 85.5 $ 82.1 $ 90.4
- -------------------------------------------------------------------------------------------------------------------------------
Company's aggregate cost $ 4.0 $ 4.0 $ 17.2
- -------------------------------------------------------------------------------------------------------------------------------
The Company does not guarantee indebtedness of its associated company and
there were no guarantees outstanding at December 31, 2004 and 2003. At December
31, 2004 and 2003, CYRO had outstanding borrowings of $1.5 and $0.0,
respectively.
Included in the Company's share of equity at December 31, 2004 and 2003, is
an accumulated charge of $9.4 and $9.2, respectively, representing the Company's
share of pretax charges by CYRO to other comprehensive income related to
recognition of a minimum pension liability. During 2004 and 2003 the Company
received dividends from CYRO of $2.5 and $4.4, respectively. No dividends were
received during 2002.
Sales to associated companies, primarily CYRO, amounted to $38.3, $37.4 and
$29.2 in 2004, 2003 and 2002, respectively. Amounts due from CYRO at December
31, 2004, 2003 and 2002 were $8.3, $9.2 and $11.5, respectively. The Company has
determined that the profit or loss on sales to its joint ventures is immaterial;
therefore, no adjustments have been made to eliminate such profit or loss on
sales to our joint venture partners for inventory that our associated companies
held at the balance sheet dates.
Fees received from associated companies, primarily CYRO, were $2.3, $7.8
and $7.7 in 2004, 2003 and 2002, respectively. Fees from CYRO are recorded in
manufacturing cost of sales and are related primarily to manufacturing services
provided to CYRO at the Company's Fortier, Louisiana, manufacturing complex.
6. INVENTORIES
See Note 1B for a discussion of the impact of a retroactive change from
LIFO to FIFO effective January 1, 2005.
December 31, 2004 2003
- -----------------------------------------------------------------
Finished goods $165.0 $114.9
Work in progress 20.6 21.5
Raw materials and supplies 78.2 73.2
- -----------------------------------------------------------------
Total inventories $263.8 $209.6
- -----------------------------------------------------------------
36
7. PLANTS, EQUIPMENT AND FACILITIES
December 31, 2004 2003
- -------------------------------------------------------------------------
Land and land improvements $ 34.7 $ 36.6
Buildings 249.8 202.9
Machinery and equipment 1,298.3 1,241.2
Construction in progress 44.4 57.6
- -------------------------------------------------------------------------
Plants, equipment and facilities, at cost $ 1,627.2 $1,538.3
- -------------------------------------------------------------------------
8. GOODWILL AND OTHER ACQUISITION INTANGIBLES
The following is the activity in the goodwill balances for each segment
(refer to Note 16):
Cytec Cytec Cytec
Performance Surface Engineered
Products Specialties Materials Corporate Total
- ----------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2002 $ 54.2 $ 27.0 $ 252.6 - $ 333.8
Purchase adjustment 0.1 - - $ 0.6 0.7
Currency exchange (0.3) - (0.2) - (0.5)
----------------- ----------------- ---------------- ----------------- ------------------
Balance, December 31, 2002 54.0 27.0 252.4 0.6 334.0
2003 acquisitions 10.5 2.5 - - 13.0
Purchase adjustment (1) - - (4.7) - (4.7)
Currency exchange (2.7) 0.2 (0.2) 0.1 (2.6)
----------------- ----------------- ---------------- ----------------- ------------------
Balance, December 31, 2003 61.8 29.7 247.5 0.7 339.7
Purchase adjustment (2) (0.1) - - - (0.1)
Currency exchange 1.9 1.0 (0.1) - 2.8
----------------- ----------------- ---------------- ----------------- ------------------
Balance, December 31, 2004 $ 63.6 $ 30.7 $ 247.4 $ 0.7 $ 342.4
- ----------------------------------------------------------------------------------------------------------------------------
(1) Purchase accounting adjustment relates to the recognition of deferred tax
assets from the Company's 1998 acquisition of The American Materials &
Technologies Corporation.
(2) Purchase accounting adjustments relate to various items, primarily revision
of pension liabilities associated with the Company's September 2003 acquisition
of certain product lines of Avecia.
Other acquisition intangibles consisted of the following major classes:
Weighted
average
useful life Accumulated
December 31, (years) Gross carrying value amortization Net carrying value
- ------------------------------------------------------------------------------------------------------------------
2004 2003 2004 2003 2004 2003
----------------------------------------------------------------------------
Technology-based 16.8 $42.5 $41.0 $(12.2) $(9.3) $30.3 $31.7
Marketing-related 17.5 11.6 11.0 (4.0) (3.0) 7.6 8.0
Customer-related 15.4 35.8 34.5 (6.9) (4.3) 28.9 30.2
----------------------------------------------------------------------------
Total $89.9 $86.5 $(23.1) $(16.6) $66.8 $69.9
- ------------------------------------------------------------------------------------------------------------------
Amortization of acquisition intangibles for the years ended December 31,
2004, 2003 and 2002 was $5.6, $4.0, and $3.1 respectively. Estimated future
amortization expense for the years 2005 and 2006 is $5.4 and for the years 2007
through 2009 is $5.3. The Company does not have intangibles with indefinite
useful lives.
37
9. DEBT
Long-term debt, including the current portion in 2004, consisted of the
following:
2004 2003
------------------------------------------------------
Carrying Carrying
Face Value Face Value
------------------------------------------------------
6.75% Notes Due March 15, 2008 $100.0 $ 98.2 $100.0 $ 97.7
6.846% Mandatory Par Put Remarketed Securities 120.0 119.0 120.0 118.9
4.60% Notes Due July 1, 2013 200.0 201.9 200.0 199.6
------------------------------------------------------
420.0 419.1 420.0 416.2
Less: Current maturities 120.0 119.0 - -
------------------------------------------------------
Long-term debt $300.0 $300.1 $420.0 $416.2
- ------------------------------------------------------------------------------------------------------------
The fair value of the Company's long-term debt, including the current
portion, based on dealer quoted values, was $418.8 at December 31, 2004, and
$426.6 at December 31, 2003.
In March 2003, the Company repaid the $100.0 current maturity of its
long-term debt. In June 2003, the Company sold $200.0 principal amount of 4.60%
Notes due July 1, 2013. The securities were offered under the Company's $400.0
shelf registration statement described below. The Company received approximately
$198.5 in proceeds from the sale after deducting costs associated with the sale.
The proceeds were intended to be used for general corporate purposes, including
the acquisition of the MEP and I&S product lines (Refer to Note 2).
Under the terms and conditions of the Mandatory Par Put Remarketed
Securities ("MOPPRS"), the final maturity date of this debt obligation will be
determined on May 6, 2005 based on the yield of 30-year U. S. Treasury bonds. If
the yield on these securities is less than 5.95% on that date, the MOPPRS are
expected to be tendered by investors on May 11, 2005 to the Remarketing Agent
for payment by the Company of face value plus accrued interest and immediately
remarketed to investors for an additional 20 years at an interest cost to the
Company equal to 5.951% plus an Applicable Spread, as defined in the Prospectus
Supplement for this security. If the 30-year Treasury yield is above 5.951% on
May 6, 2005, investors are expected to put the MOPPRS back to the Company and
have them redeemed at face value plus accrued interest. The put premium of $4.5
that was received by the Company upon issuance of the MOPPRS was recorded as an
increase in the carrying value of the securities and is being amortized over the
life of the issue as a decrease in interest expense. If the securities are
redeemed by the Company on May 11, 2005, the Company would recognize a net
expense of $1.0 from amounts related to the unamortized put premium and rate
lock agreements discussed below. Based on interest rates at December 31, 2004,
the Company believes that it is likely that the MOPPRS will be tendered to the
remarketing agent at face value plus accrued interest and remarketed to
investors for an additional 20 years.
Commencing in September 1997, the Company entered into a series of rate
lock agreements to hedge against the risk of an increase in treasury rates
related to the Company's offering of $300.0 in long-term debt securities. During
1997 and 1998, the Company made payments aggregating approximately $11.2 to
settle the rate lock agreements, which related to the then outstanding long-term
debt securities. The payments related to the settlement of the rate lock
agreements are being amortized over the remaining life of 6.75% Notes and 6.846%
MOPPRS as an increase in interest expense of such Notes. In June 2003, the
Company received $0.4 under rate lock agreements it entered into as a hedge
against the risk of an increase in Treasury rates related to the Company's
offering of $200.0 in long-term debt securities. It is being amortized over the
life of the 4.60% Notes. The amount of unamortized rate lock agreements included
in long-term debt was $4.7 at December 31, 2004, and $5.2 at December 31, 2003.
During 2004, the Company terminated certain interest rate swaps which had
been designated as cash flow hedges. The net gain thereon of $2.9 is being
amortized over the life of the 4.60% Notes as a decrease to interest expense of
such Notes. The amount of the unamortized swap settlement included in long-term
debt was $2.7 at December 31, 2004.
The weighted average interest rate on long-term debt was approximately 5.7%
for 2004 and 6.1% for 2003.
In 2003 the Company entered into short-term loan agreements relating to the
acquisition of MCY's coatings resins product line (Refer to Note 2), aggregating
approximately 2 billion yen. The U. S. dollar equivalent debt balance
outstanding under these agreements at December 31, 2003 was $9.3 and is included
in short-term borrowings. In January, 2004, the Company canceled one of these
agreements and the short-term loan was repaid during 2004 resulting in no amount
outstanding at December 31, 2004.
At December 31, 2004 and 2003, the Company has available for short-term use
38
approximately $16.5 and $6.6, respectively, of non-U. S. dollar denominated
credit facilities. There were no outstanding borrowings under these facilities
at December 31, 2004 or 2003.
Cash payments during the years ended December 31, 2004, 2003 and 2002,
included interest of $20.2, $18.2 and $21.5, respectively. Included in interest
expense, net, for the years ended December 31, 2004, 2003 and 2002, is interest
income of $5.5, $3.8 and $5.5, respectively. Included in 2002 interest income is
$2.0 received in connection with a favorable settlement of a prior years'
research and development tax credits claims with the Internal Revenue Service.
In April, 2002, the Company executed a $100.0, three-year unsecured
revolving credit agreement and a $100.0, 364-day unsecured revolving credit
agreement with a one-year term out option which was allowed to expire in April,
2004. There were no outstanding balances under these agreements at December 31,
2004 and 2003. On February 15, 2005, the Company entered into credit agreements
totaling $1.775 billion in preparation for the upcoming acquisition of Surface
Specialties. The agreements provide: a $725.0 5-year term loan facility, a
$700.0 364-day credit facility, and a $350.0 5-year revolving credit facility.
The term loan and 364-day facilities will be used to finance the acquisition and
the revolving credit facility will provide additional liquidity for general
corporate purposes, including acquisitions. The facilities contain covenants
that are customary for such facilities
The Company has the ability to issue $200.0 more debt securities under a
$400.0 shelf registration statement it has filed with the Securities and
Exchange Commission that has been effective since December 2000. The securities
may be offered by the Company from time to time. Proceeds of any sale will be
used for general corporate purposes, which may include payment of indebtedness
and other liabilities, share repurchases, additions to working capital, capital
expenditures and acquisitions.
10. CONTINGENCIES AND COMMITMENTS
Environmental Matters
The Company is subject to substantial costs arising out of environmental
laws and regulations, which include obligations to remove or limit the effects
on the environment of the disposal or release of certain wastes or substances at
various sites or to pay compensation to others for doing so.
The Company's most significant environmental liabilities relate to
remediation and regulatory closure obligations at manufacturing sites now or
formerly owned by the Company. The Company is also involved in legal proceedings
directed at the cleanup of various other sites, including a number of federal or
state Superfund sites. Since the laws pertaining to Superfund sites generally
impose retroactive, strict, joint and several liability, a governmental
plaintiff could seek to recover all remediation costs at any such site from any
of the potentially responsible parties ("PRPs") for such site, including the
Company, despite the involvement of other PRPs. In some cases, the Company is
one of several hundred identified PRPs, while in others it is the only one or
one of only a few. Generally, where there are a number of financially solvent
PRPs, liability has been apportioned, or the Company believes, based on its
experience with such matters, that liability will be apportioned based on the
type and amount of waste disposed by each PRP at such disposal site and the
number of financially solvent PRPs. In many cases, the nature of future
environmental expenditures cannot be quantified with accuracy. In addition, from
time to time in the ordinary course of its business, the Company is informed of,
and receives inquiries with respect to, additional sites that may be
environmentally impaired and for which the Company may be responsible.
As of December 31, 2004 and 2003, the aggregate environmental related
accruals were $70.7 and $79.6, respectively, of which $10.0 and $11.0,
respectively, are included in accrued expenses with the remainder included in
other noncurrent liabilities. Environmental remediation spending, for the years
ended December 31, 2004, 2003 and 2002, was $9.4, $9.3 and $10.2, respectively.
Included in 2004 is a payment of $2.5 related to an environmental remediation
lawsuit settled by the Company in June 2004 which was charged against previously
established reserves for this matter. This payment was part of a larger
settlement related to several environmental and toxic tort lawsuits in the
second quarter of 2004 discussed below under "Other Contingencies."
These accruals can change substantially due to such factors as additional
information on the nature or extent of contamination, methods of remediation
required, changes in the apportionment of costs among responsible parties and
other actions by governmental agencies or private parties or if the Company is
named in a new matter and determines an accrual needs to be provided for or if
the Company determines it is not liable and no longer requires an accrual.
Other Contingencies
The Company is the subject of numerous lawsuits and claims incidental to
the conduct of its or certain of its predecessors' businesses, including
lawsuits and claims relating to product liability, personal injury including
asbestos, environmental, contractual, employment and intellectual property
matters.
39
As of December 31, 2004 and 2003, the aggregate self-insured and insured
contingent liability was $68.4 and $72.5, respectively, and the related
insurance recovery receivable was $37.9 and $29.3, respectively. The asbestos
liability included in the above amounts at December 31, 2004 and 2003 was $50.4
and $54.0, respectively, and the related insurance receivable was $34.2 and
$29.1, respectively. The Company anticipates receiving a net tax benefit for
payment of those claims to which full insurance recovery is not realized.
During 2003 the Company commissioned a study by the Actuarial and Analytics
Practice of AON Risk Consultants ("AON") of its self-insured and insured
contingent liabilities related to asbestos and estimated insurance recoveries
for asbestos related liabilities. At that time, the Company, like many other
industrial companies, was named as one of hundreds of defendants in a number of
lawsuits filed throughout the United States by persons alleging bodily injury as
a result of exposure to asbestos as plaintiffs' attorneys shifted their focus on
peripheral defendants, such as the Company. The claimants allege exposure to
asbestos at facilities formerly or currently owned by the Company or from
products formerly manufactured by the Company for specialized applications. Most
of these cases involve numerous defendants, sometimes as many as several
hundred. Historically, most of the closed asbestos claims against the Company
have been dismissed without any indemnity payment by the Company, and the
Company has no information that this pattern will change. An updated study was
not commissioned in 2004, because in management's judgment, actual claims
experience was in line with the results of the original study.
The Company worked with the consulting specialists of AON who have
extensive experience in estimating certain liabilities, including asbestos
liabilities, to evaluate the Company's estimated indemnity costs. The Company
provided AON with, among other things, detailed data for the past ten years on
the incidence of claims, the incidence of malignancy claims, indemnity payments
for malignancy and non-malignancy claims, and dismissal rates by claim. The
actuarial methodology employed by AON was primarily based on epidemiological
data assumptions regarding asbestos disease manifestation, the information
provided by the Company, and the estimates of claim filing and indemnity costs
that may occur in the future.
The Company has access to a substantial amount of primary and excess
general liability insurance. Therefore, the Company, in conjunction with AON,
conducted a detailed review of its insurance policies and estimated insurance
recoveries. The Company expects to recover close to 50% of its future indemnity
costs and certain defense and processing costs already incurred. Most of the
Company's insurance is with carriers with investment grade ratings and only
those with such ratings were included in the estimation of the recovery of
indemnity and defense costs.
As a result of these findings, in 2003 the Company recorded an increase of
$32.4 to its self insured and insured contingent liabilities for pending and
anticipated probable future asbestos claims and recorded a receivable for
probable insurance recoveries for past, pending and future claims of $34.6.
The following table presents information about the number of claimants
involved in asbestos cases with the Company:
Year Ended Year Ended
December 31, December 31,
2004 2003
------------------------------------
Number of claimants associated with claims closed during period 3,540 7,601
Number of claimants associated with claims opened during period 4,532 7,648
Number of claimants at end of period 27,947 26,955
- ---------------------------------------------------------------------------------------------------------
It should be noted that the ultimate liability and related insurance
recovery for all pending and anticipated future claims cannot be determined with
certainty due to the difficulty of forecasting the numerous variables that can
affect the amount of the liability and insurance recovery. These variables
include but are not limited to: (i) significant changes in the number of future
claims; (ii) significant changes in the average cost of resolving claims; (iii)
changes in the nature of claims received; (iv) changes in the laws applicable to
these claims; and (v) financial viability of co-defendants and insurers.
The Company is among several defendants in approximately 30 cases, in which
plaintiffs assert claims for personal injury, property damage, and other claims
for relief relating to lead pigment that was used as an ingredient decades ago
in paint for use in buildings. The different suits were brought by government
entities and/or individual plaintiffs, on behalf of themselves and others. The
suits variously seek compensatory and punitive damages and/or injunctive relief,
including funds for the cost of monitoring, detecting and removing lead based
paint from buildings and for medical monitoring; for personal injuries allegedly
caused by ingestion of lead based paint; and plaintiffs' attorneys' fee. The
Company believes that the suits are without merit and is vigorously defending
against all such claims. Accordingly, no loss contingency has been recorded. The
Company has access to a substantial amount of primary and excess general
liability insurance for property damage and believes these policies are
available to cover a significant portion of both its defense costs and indemnity
costs, if any, for lead pigment-related property damage claims. The Company
40
continues to pursue an agreement with various of its insurers concerning
recovery of defense costs relating to these matters. During 2004, the Company
received $1.0 related to previously expensed defense costs which were recorded
in other income, net, and recorded an additional $2.0 in other income, net as it
believes it is probable that it will realize additional recoveries of previously
expensed lead defense costs from its insurers. The Company is hopeful of
recognizing additional recoveries in future periods as negotiations with its
insurers proceed.
During 2004, the Company recorded a pre-tax charge of $6.1 in connection
with the settlement of several environmental and toxic tort lawsuits which were
all related to a single manufacturing site operated by the former American
Cyanamid Company ("Cyanamid") prior to 1963. Cytec was spun-off from Cyanamid in
1993. The full settlement which was paid in the second quarter was $8.6, of
which $2.5 was charged against a previously established environmental
remediation reserve for these matters.
During 2004, the Company signed a stipulation of settlement with plaintiffs
in a federal class action lawsuit on behalf of purchasers of carbon fiber. As a
result of this and several other related litigation matters, the Company
recorded a pre-tax charge of $8.0 which is reflected in administrative and
general expense in the third quarter of 2004. Also during the third quarter, the
Company recorded a charge of $2.0 relating to the settlement of disputed matters
with the holder of the Company's Series C Stock.
The Company commenced binding arbitration proceedings against SNF SA,
("SNF"), in 2000 to resolve a commercial dispute relating to SNF's failure to
purchase agreed amounts of acrylamide under a long-term agreement. Recently, the
arbitrators awarded the Company damages and interest aggregating approximately
11 million euros. Cytec has obtained a court order in France to enforce the
award, which order is being appealed by SNF. No gain contingency has been
recorded. Subsequent to the arbitration award, SNF filed a complaint alleging
criminal violation of French and European Community antitrust laws relating to
the contract which was the subject of the arbitration proceedings. The Company
believes that the complaint is without merit.
Periodically, the Company enters into settlement discussions for lawsuits
or claims for which it has meritorious defenses and for which an unfavorable
outcome against the Company is not probable. In such instances, no loss
contingency is recorded since a loss is not probable and it is the Company's
policy to accrue defense costs as incurred. Typically, the Company considers
these types of settlements in fairly limited circumstances usually related to
the avoidance of future defense costs and/or the elimination of any risk of an
unfavorable outcome. Such settlements, if any, are recorded when it is probable
a liability has been incurred, typically upon entering into a settlement
agreement.
While it is not feasible to predict the outcome of all pending
environmental matters, lawsuits and claims, it is reasonably possible that there
will be a necessity for future provisions for costs for environmental matters
and for other contingent liabilities that in management's opinion, will not have
a material adverse effect on the consolidated financial position of the Company,
but could be material to the consolidated results of operations or cash flows of
the Company in any one accounting period. The Company cannot estimate any
additional amount of loss or range of loss in excess of the recorded amounts.
Moreover, many of these liabilities are paid over an extended period, and the
timing of such payments cannot be predicted with any certainty.
From time to time the Company is also included in legal proceedings as a
plaintiff involving tax, contract, patent protection, environmental and other
legal matters. Gain contingencies related to these matters, if any, are recorded
when they are realized.
Commitments
Rental expense under property and equipment leases was $10.8 in 2004, $10.2
in 2003 and $10.9 in 2002. Estimated future minimum rental expenses under
property and equipment leases that have initial or remaining noncancelable lease
terms in excess of one year as of December 31, 2004, are:
Operating
Leases
- ------------------------------------------------
2005 $ 9.1
2006 6.6
2007 4.8
2008 2.8
2009 2.4
Thereafter 19.6
- ---------------------------------------------
Total minimum lease payments $ 45.3
- ---------------------------------------------
The Company frequently enters into long-term contracts with customers with
terms that vary depending on specific industry practices. The Company's business
is not substantially dependent on any single contract or any series of related
contracts. Set forth below are more specific terms about the Company's
significant sales contracts.
41
The Company has the option to sell, and an affiliate of an international
trading company is obligated to buy, up to approximately 50% of the
Company's production capacity of acrylonitrile per year (40% effective May
1, 2005) under a long-term distributorship agreement that is scheduled to
expire on May 1, 2008. The price under this distributorship agreement is
market-based less certain costs and commissions.
The Company is obligated to sell, and CYRO is obligated to buy,
substantially all of the Company's nominal production capacity of
hydrocyanic acid under an agreement with an initial term expiring December
31, 2011. Price is determined by a formula based on the raw materials used
to manufacture hydrocyanic acid and to a lesser extent on the selling price
of CYRO's product based on hydrocyanic acid and is adjusted periodically.
The Company is obligated to sell sulfuric acid, and also to regenerate used
sulfuric acid, and CYRO is obligated to buy such product and services,
under an agreement with an initial term expiring December 31, 2011. The
price for regenerated sulfuric acid is cost based and the price for
sulfuric acid is set between the price for regenerated sulfuric acid and a
market price for sulfuric acid and both prices are adjusted periodically.
The cost to regenerate sulfuric acid is substantially in excess of the cost
of producing sulfuric acid. Regenerated sulfuric acid and sulfuric acid are
produced in the same plant at the same time.
The Company is obligated to manufacture, at the customer's option, up to
100% of the customer's requirements for certain paper chemical products
under a long-term manufacturing supply agreement that expires in October,
2005, subject to various volume limitations. The Company also agreed to
sell and the customer agreed to buy, 100% of the customer's requirements
for two materials produced by the Company for use in the manufacture of
certain paper chemicals by the customer in the U. S. and certain other
countries. The prices for the Company's services are cost-based, including
a fixed component, and are adjusted periodically. The prices for the
materials produced by the Company are market based and are adjusted
periodically. The Company has negotiated another supply agreement with the
same customer scheduled to commence in November 2005 and expire in October
2008. The new agreement contains provisions for prices which will be are
market based and which will be adjusted periodically.
The Company is obligated to sell and, subject to numerous exceptions, an
aerospace customer is obligated to buy its requirements of various
specialty materials for certain of its products as determined by the
customer, under an agreement that is scheduled to expire June 30, 2005, or
for some products, June 30, 2007. Price is in U.S. dollars, and is fixed by
year.
The Cytec Engineered Materials segment is party to a number of long-term
supply and pricing agreements that cover various time periods. Such
agreements are common practice in the aerospace and aircraft manufacturing
industries.
The Company frequently enters into long-term agreements in order to lock-in
price and availability of raw materials and services required to operate its
businesses. At December 31, 2004, obligations under such agreements totaled
$46.6.
The Company had $25.2 of outstanding letters of credit, surety bonds and
bank guarantees at December 31, 2004 that are issued on the Company's behalf in
the ordinary course of business to support certain performance obligations and
commitments of the Company. The instruments are typically renewed on an annual
basis.
11. INCOME TAXES
The income tax provision is based on earnings before income taxes and, in
2003, cumulative effect of accounting change as follows:
- ----------------------------------------------------------------------------
2004 2003 2002
- ----------------------------------------------------------------------------
U. S. $ 105.1 $ 68.7 $ 51.4
Non-U. S. 67.3 60.7 57.8
- ----------------------------------------------------------------------------
Total $172.4 $129.4 $109.2
- ----------------------------------------------------------------------------
42
The components of the income tax provision (benefit) are as follows:
- --------------------------------------------------------------------------
2004 2003 2002
- --------------------------------------------------------------------------
Current:
U. S. Federal $ 6.3 $ 1.9 $ 1.3
Non-U. S. 12.8 16.2 16.1
Other, principally state 2.2 1.4 1.6
- --------------------------------------------------------------------------
Total 21.3 19.5 19.0
- --------------------------------------------------------------------------
Deferred:
U. S. Federal 20.3 10.4 7.4
Non-U. S. (0.1) 0.9 2.9
Other, principally state (0.1) 5.8 1.2
- --------------------------------------------------------------------------
Total 20.1 17.1 11.5
- --------------------------------------------------------------------------
Total income tax provision $ 41.4 $ 36.6 $ 30.5
- --------------------------------------------------------------------------
Income taxes paid in 2004, 2003 and 2002 were $16.6, $14.7 and $13.4,
respectively and include non-U. S. taxes of $15.7, $12.0 and $9.6 in 2004, 2003
and 2002, respectively.
U. S. and non-U. S. earnings of consolidated companies, before income taxes,
include all earnings derived from operations in the respective U.S and non-U. S.
geographic areas; whereas provisions (benefits) for income taxes include all
income taxes payable to (receivable from) U. S. Federal, non-U. S. and other
governments as applicable, regardless of the situs in which the taxable income
(loss) is generated. The temporary differences that give rise to a significant
portion of deferred tax assets and liabilities were as follows:
- --------------------------------------------------------------------------------
December 31, 2004 2003
- --------------------------------------------------------------------------------
Deferred tax assets:
Allowance for bad debts $ 2.5 $ 1.9
Insurance accruals 26.4 28.3
Operating accruals 14.9 12.5
Environmental accruals 26.7 30.4
Pension and postretirement benefit liabilities 149.1 134.8
Employee benefit accruals 18.9 14.6
Tax credit carry forwards 13.9 17.6
Net operating losses 13.1 8.8
Other 3.8 2.7
- --------------------------------------------------------------------------------
Gross deferred tax assets 269.3 251.6
- --------------------------------------------------------------------------------
Valuation allowance (12.2) (4.6)
- --------------------------------------------------------------------------------
Total net deferred tax assets 257.1 247.0
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Inventory (11.1) (6.9)
Plants, equipment and facilities (124.4) (122.0)
Insurance receivables (13.4) (13.7)
Other (30.3) (23.6)
- --------------------------------------------------------------------------------
Gross deferred tax liabilities (179.2) (166.2)
- --------------------------------------------------------------------------------
Net deferred tax assets $ 77.9 $ 80.8
- --------------------------------------------------------------------------------
The American Jobs Creation Act of 2004 (the "Act") introduced a special
one-time dividend received deduction on the repatriation of certain foreign
earnings to a U.S. taxpayer provided certain criteria are met. The Company has
completed its evaluation of this repatriation provision and concluded that no
earnings will be repatriated under the Act at the present time given the pending
acquisition of Surface Specialties. In addition, no provision has been made for
U.S. or additional non-U.S. taxes on the undistributed earnings of international
subsidiaries totaling $370.8, the repatriation of which would not be subject to
the special one-time dividend received deduction under the Act, since the
Company intends to reinvest these earnings. It is not practicable to calculate
the unrecognized deferred tax liability on such earnings. U.S foreign tax
credits would be available to substantially reduce any amount of additional U.S.
tax that might be payable on these earnings in the event of a distribution or
sale.
At December 31, 2004, the Company has U.S. federal income tax net operating
loss carryforwards of $10.6 relating to the Company's 1998 acquisition of The
43
American Materials & Technologies Corporation available to offset future taxable
income. Utilization of those loss carryforwards is limited under certain
provisions of the Internal Revenue Code. The carryforwards begin to expire at
various dates starting in 2008 through 2018.
The Company has U.S. research and development tax credit carryforwards of
$8.5 available as of December 31, 2004 to offset future tax liabilities. These
carryforwards begin to expire at various dates starting in 2023 through 2025.
Foreign tax credit carryforwards of $2.2 are available to offset future tax
liabilities. The Act extended the period of time over which foreign tax credits
may be carried forward from five years to ten years. Accordingly, such foreign
tax credits will now expire at various dates starting in 2012 through 2014.
The long-term earnings trend of the Company makes it more likely than not
that the Company will generate sufficient taxable income on a consolidated basis
to realize its net deferred tax assets with the exception of certain state net
operating loss carryforwards and state tax credits. In 2004, the Company
recorded a tax benefit primarily related to state income tax net operating
losses and state tax credit carryforwards of $7.6, and reflected a corresponding
increase to the valuation allowance in the same amount, due to the uncertainty
of future earnings with respect to various U.S. entities of the Company.
Accordingly, for the years ended December 31, 2004 and 2003, the Company has
recorded a valuation allowance of $12.2 and $4.6, respectively, for the deferred
tax assets primarily attributable to such U.S. state tax attributes.
The Internal Revenue Service (the "IRS") has completed and closed its
audits of the Company's tax returns through 1998. In January, 2005, the Company
was notified that the Congressional Joint Committee on Taxation (the "Joint
Committee") approved the final IRS examination findings for the years 1999
through 2001. Joint Committee also approved a separate tax refund claim filed by
the Company for 1998 at this time. The approval by Joint Committee resulted in a
tax refund of approximately $0.2 and $0.1 for the years 1998 and 2000
respectively, which will be recorded in the first quarter of 2005. As a result
of the resolution of these audits, the Company will also record a reduction in
tax expense of approximately $16.0 in 2005. The IRS is also currently conducting
audits of the Company's tax returns for the years 2002 and 2003. The Company
believes that adequate provisions for all outstanding issues have been made for
all open years.
During 2004, the Company received the final audit report issued by the
Norwegian tax authorities disclosing an income tax adjustment with respect to a
1999 restructuring of the Company's European operations. The tax liability
attributable to this adjustment, excluding interest and possible penalties, is
105 million Norwegian Krone ($17.3) as of December 31, 2004.
The Company has retained tax counsel to assist in the defense of this
assessment since the issue will likely be litigated given the Company's vigorous
defense in protesting the additional tax. Notwithstanding the Company's
meritorious defenses in this matter, in prior years as this matter developed,
the Company accrued for the potential unfavorable outcome of this dispute.
Assuming the dispute resolution process follows a normal course, final
resolution of this matter, and the impact, if any, on the cash flows of the
Company will probably occur in 2005 or 2006.
In 2004 there was a reduction of $2.4 to the income tax provision, related
to a favorable outcome of the completion of several years of tax audits in an
international tax jurisdiction. The Company also recorded a tax benefit in 2004
of $1.2 U.S. and $0.7 non-U.S., to account for the effects on the Company's
deferred tax assets and liabilities attributable to changes in tax rates in
various jurisdictions.
A reconciliation of the Company's effective tax rate to the U. S. federal income
tax rate is as follows:
- ---------------------------------------------------------------------------
2004 2003 2002
- ---------------------------------------------------------------------------
Federal income tax rate 35.0% 35.0% 35.0%
Research and development credit (1.8) (3.2) (3.3)
Prior period tax credits (a) - - (5.5)
Income subject to other than
the federal income tax rate (7.1) (6.3) (2.7)
Change in foreign tax rates (0.4) - -
State taxes, net of federal benefits (2.8) 2.0 2.1
Change in state tax rates (0.7) - -
Valuation allowance 4.4 3.6 -
Other (credits) charges, net (2.6) (2.8) 2.3
- ----------------------------------------------------------------------------
Effective tax rate 24.0% 28.3% 27.9%
- ----------------------------------------------------------------------------
(a) In 2002 the Company recognized a $6.0 reduction in income tax expense
related to U. S. approval of a claim for refund with respect to prior years'
research and development tax credits.
44
In 2003 a tax benefit of $7.3 was allocated to the cumulative effect of
accounting change.
Tax benefits on stock option exercises of $11.7, $7.9 and $1.8 were
allocated directly to stockholders' equity for 2004, 2003 and 2002,
respectively.
12. EMPLOYEE BENEFIT PLANS
The Company has defined benefit pension plans that cover employees in the
United States and in a number of other countries. Almost all of the plans
provide defined benefits based on years of service and career average salary.
The Company also sponsors postretirement and postemployment benefit plans. The
postretirement plans provide medical and life insurance benefits to retirees who
meet minimum age and service requirements. The medical plans are contributory
and non-contributory with certain participant's contributions adjusted annually;
the life insurance plans are non-contributory. The accounting for the
postretirement plans anticipates future cost-sharing and changes to the plans.
The postretirement plans include a cap on the Company's share of costs for
recent and future retirees. The postemployment plans provide salary
continuation, disability related benefits, severance pay and continuation of
health costs during the period after employment but before retirement.
The Company uses a measurement date of December 31 for the U. S. and
Canadian pension and postretirement benefit plans and uses a measurement date of
November 30 for the majority of all other pension plans.
Pension Plans Postretirement Plans
------------------------------ ------------------------------
2004 2003 2002 2004 2003 2002
- -------------------------------------------------------------------------------------------------------------
Net periodic cost:
Service cost $14.4 $12.5 $11.3 $1.0 $1.4 $1.1
Interest cost 34.7 32.5 29.3 14.3 16.6 16.7
Expected return on plan assets (38.9) (35.5) (33.9) (4.9) (5.0) (5.4)
Net amortization and deferral 7.8 3.4 1.0 (10.6) (10.7) (9.4)
----------------------------------------------------------------
Net periodic expense (credit) $18.0 $12.9 $7.7 $(0.2) $2.3 $3.0
----------------------------------------------------------------
Weighted-average assumptions used
to determine net periodic cost,
during the year:
Discount rate 6.0% 6.4% 6.6% 6.3% 6.8% 7.3%
Expected return on plan assets 8.0% 8.1% 8.3% 6.5% 6.5% 7.0%
Rate of compensation increase 3%-10% 3%-10% 3%-10% - - -
Weighted-average assumptions used
to determine benefit obligations,
end of year:
Discount rate 5.6% 6.1% 6.6% 5.8% 6.3% 6.8%
Rate of compensation increase 3%-10% 3%-10% 3%-10% - - -
- -------------------------------------------------------------------------------------------------------------
The expected rate of return on U.S. plan assets was determined by examining
the annualized rates of return over the past five and ten year periods for the
major U.S. stock and bond indexes and the estimated long-term asset mix of the
plan assets of 55% - 65% stocks and 35% - 45% bonds. Since the long-term average
annualized return is approximately 9% - 11% for stocks and 5% - 7% for bonds,
the expected long-term weighted average return was estimated to be 8.5% for the
U.S. pension plans in 2004 and 2003. This return is based on an assumed
allocation of assets of 62% in stocks and 38% in bonds with long-term investment
returns of 10% and 6%, respectively. The expected long-term weighted average
return on all the Company's pension plans, including the U.S. plans, was 8.0%
and 8.1% in 2004 and 2003, respectively. For postretirement plans, all of which
are assets held in the U.S., the expected rate of return was 6.5% in 2004 and
2003, based on the same investment return assumptions and an assumed asset
allocation of 55% in stocks, 30% in bonds and 15% in cash in 2004 and 45% in
stocks, 33% in bonds and 22% in cash in 2003. The investment strategy for the
Company's worldwide benefit plan assets is to maintain broadly-diversified
portfolios of stocks, bonds and money market instruments that, along with
periodic plan contributions, provide the necessary liquidity for ongoing benefit
obligations.
The expected return on non-U.S. plan assets is also based on the historical
rates of return of the various asset classes in each country and the
corresponding asset mix. In the Netherlands, where the Company has its largest
non-U.S. pension plan, the assumed rate of return was 6.25% in 2004. This return
is based on assumed rates of return of 9% for equities and 5% for bonds and an
assumed asset allocation of 31% stocks and 69% bonds and cash.
45
Pension Plans Postretirement Plans
--------------------------- ------------------------
2004 2003 2002 2004 2003 2002
- ---------------------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at January 1 $565.4 $489.1 $404.0 $271.5 $253.6 $247.7
Addition of a plan 2.1 0.7 8.7 - - -
Service cost 14.4 12.5 11.3 1.0 1.4 1.1
Interest cost 34.7 32.5 29.3 14.3 16.6 16.7
Amendments (0.1) (0.2) - - - (31.2)
Acquisitions - 18.2 - - 2.7 -
Translation difference 10.2 16.1 9.9 0.1 0.1 0.1
Actuarial gains/(losses) 44.5 21.2 48.3 (15.7) 20.1 43.3
Employee contributions 0.9 0.5 0.6 3.4 2.6 2.2
Benefits paid (25.9) (25.2) (23.0) (26.0) (25.6) (26.3)
--------------------------- ------------------------
Benefit obligation at December 31 $646.2 $565.4 $489.1 $248.6 $271.5 $253.6
--------------------------- ------------------------
Accumulated benefit obligation at
December 31 $ 617.3 $ 544.2 $ 489.2 - - -
--------------------------- ------------------------
Change in plan assets:
Fair value of plan assets at January 1 $430.5 $350.0 $354.7 $74.6 $70.5 $73.3
Addition of a plan - 0.3 6.5 - - -
Actual return/(losses) on plan assets 39.2 52.5 (18.1) 3.8 8.3 0.5
Company contributions 32.2 27.5 20.5 15.8 18.7 20.8
Employee contributions 0.9 0.5 0.6 3.4 2.7 2.2
Acquisitions - 10.7 - - - -
Translation difference 8.4 14.2 8.8 - - -
Benefits paid (25.9) (25.2) (23.0) (26.0) (25.6) (26.3)
--------------------------- ------------------------
Fair value of plan assets at
December 31 $ 485.3 $ 430.5 $ 350.0 $ 71.6 $ 74.6 $ 70.5
--------------------------- ------------------------
Funded status: $(160.9)$(134.9)$(139.1) $(177.0)$(196.9)$(183.1)
Unrecognized actuarial losses 212.4 174.1 170.9 20.6 35.0 18.6
Unrecognized prior service cost 0.9 0.3 (0.8) (74.5) (85.1) (95.7)
Unrecognized net transition obligation - - - - - -
------------------------ ------------------------
Net amount recognized $52.4 $39.5 $31.0 $(230.9)$(247.0)$(260.2)
------------------------ ------------------------
Amounts recognized in the consolidated balance
sheets consist of:
Prepaid benefit cost $24.1 $10.6 $3.9 - - -
Accrued benefit cost (147.9) (118.1) (119.1) (230.9) (247.0) (260.2)
Intangible asset 5.6 6.2 6.9 - - -
Accumulated other comprehensive
income, exclusive of deferred taxes 170.6 140.8 139.3 - - -
------------------------ ------------------------
Net amount recognized $52.4 $39.5 $31.0 $(230.9)$(247.0)$(260.2)
- ---------------------------------------------------------------------------------------------------------------
The accrued postretirement benefit cost recognized in the consolidated
balance sheets at December 31, 2004 and 2003 includes $20.0 in accrued expenses
at each date and $210.9 and $227.0, respectively, in pension and other
postretirement benefit liabilities.
The Company recorded a non-cash after-tax minimum pension liability
adjustment charge of $11.5 to Other Comprehensive Income in 2004 and a credit of
$1.2 and a charge of $92.6 in 2003 and 2002, respectively. The significant
charge in 2002 was a result of the combination of decreases in the fair value of
plan assets due to a declining equity market and increased pension liabilities
primarily due to the lower weighted average discount rate of 6.6% in 2002 from
7.0% in 2001. The charge to Other Comprehensive Income did not trigger any
special funding requirements. The Company has contributed to its U. S. pension
46
plan every year since its inception in 1993. The Company is not currently
required to make any minimum contributions to its U.S. plans other than the plan
associated with the acquisition of Avecia.
The assumed rate of future increases in the per capita cost of healthcare
benefits (healthcare cost trend rate) is 9.0% in 2005, decreasing to ultimate
trend of 5.0% in 2009. The healthcare cost trend rate has a significant effect
on the reported amounts of accumulated postretirement benefit obligation
("APBO") and related expense. A 1.0% change in assumed health care cost trend
rates would have the following effect:
2004 2003
-------------------------------- --------------------------------
1% Increase 1% Decrease 1% Increase 1% Decrease
- ------------------------------------------------------------------------------------------------------------------------------
Approximate effect on the total of service and
interest cost components of other postretirement
benefit cost $ 1.5 $ (1.2) $ 1.4 $ (1.3)
Approximate effect on accumulated
postretirement benefit obligation $23.9 $(21.2) $21.6 $(20.0)
- ------------------------------------------------------------------------------------------------------------------------------
At the end of 2004 and 2003, the projected benefit obligation, accumulated
benefit obligation, and fair value of plan assets for the U. S. pension plans,
pension plans outside the U. S., and pension plans with an accumulated benefit
obligation in excess of plan assets, were as follows:
U. S. Plans Non-U. S. Plans Total
----------------------- --------------------- ---------------------------
End of Year 2004 2003 2004 2003 2004 2003
- ---------------------------------- ----------- ----------- ---------- ---------- -------------- ------------
Projected benefit obligation $(506.2) $(455.7) $(68.4) $(55.1) $(574.6) $(510.8)
Accumulated benefit obligation (489.0) (438.8) (63.8) (51.2) (552.8) (490.0)
Fair value of plan assets 369.9 337.0 48.9 37.2 418.8 374.2
- ---------------------------------- ----------- ----------- ---------- ---------- -------------- ------------
The asset allocation for the Company's U. S. pension plans and
postretirement plans at the end of 2004 and 2003, and the target allocation for
2005, by asset category, are as follows:
U.S. Pension Plans Postretirement Plans
- ------------------------------------------------- -------------------------------------------------
Plan Plan
Target Assets at Year End Target Assets at Year End
allocation allocations
----------- ------------------ ----------- --------------------
Asset Category 2005 2004 2003 Asset Category 2005 2004 2003
- ---------------- ----------- ------------------ -------------- ----------- --------------------
Equity Equity
Securities 63% 63% 59% Securities 55% 55% 45%
Fixed Income 37% 37% 41% Fixed Income 45% 45% 55%
----------- ------------------ ----------- --------------------
Total 100% 100% 100% Total 100% 100% 100%
- ----------------------------------------------------------------------------------------------------
Non-U.S. Pension Plans
- -------------------------------------------------
Plan
Target Assets at Year End
allocation
----------- ------------------
Asset Category 2005 2004 2003
- ---------------- ----------- ------------------
Equity
Securities 20%-45% 41% 41%
Fixed Income 35%-70% 52% 38%
Cash and other 5%-15% 7% 21%
----------- ------------------
Total 100% 100% 100%
- -------------------------------------------------
The total fair value of U. S. pension and postretirement plan assets was
$441.5 and $411.6 at December 31, 2004 and 2003. The Company uses a combination
of active and passive stock and bond managers to invest the assets of the U. S.
and non-U.S pension and postretirement plans. The managers are selected based on
an analysis of, among other things, their historical investment results,
frequency of management turnover, cost structure, and assets under management.
Assets are periodically reallocated among the investment managers to maintain
the appropriate asset mix and occasionally transferred to new or existing
managers in the event that a manager is terminated.
47
Information about the expected cash flows for the U. S. pension and
postretirement benefit plans follows:
Expected Employer Contributions Pension Plans Postretirement Plans
- ----------------------------------- -------------------- ----------------------------------------------------------
2005 $10.0 $20.5
Postretirement Benefits
Prior to Medicare Part D Postretirement Benefits
Subsidy Anticipated Medicare Part
Expected Benefit Payments Pension Benefits D Subsidy
- ----------------------------------- -------------------- -------------------------- ----------------------------
2005 $22.2 $20.3 $0.0
2006 23.0 21.1 2.9
2007 24.0 21.7 3.0
2008 25.1 21.9 3.2
2009 26.5 21.9 3.3
2010-2014 160.4 109.2 17.7
- ----------------------------------- -------------------- -------------------------- ----------------------------
The above table reflects the total benefits expected to be paid from the
plan and the Company's assets.
Information about the expected cash flows for the non-U. S. pension plans
follows:
Expected Employer Contributions Pension Plans
- ------------------------------------ ----------------------
2005 $5.8
Expected Benefit Payments Pension Benefits
- ------------------------------------ ----------------------
2005 $3.1
2006 3.4
2007 3.4
2008 4.1
2009 4.5
2010-2014 22.2
- ------------------------------------ ----------------------
The above table reflects the total benefits expected to be paid from the
plans and the Company's assets.
The Company also sponsors various defined contribution retirement plans in
the United States and a number of other countries, consisting primarily of
savings and profit growth sharing plans. Contributions to the savings plans are
based on matching a percentage of employees' contributions. Contributions to the
profit growth sharing plans are generally based on the Company's financial
performance. Amounts expensed related to these plans in 2004, 2003, and 2002 are
as follows:
2004 2003 2002
- ----------------------------------------------------------
U.S
Profit Growth Sharing $ 9.1 $ 5.5 $ 5.0
Savings Plan 7.0 6.1 5.7
-------------------------------
Total $16.1 $11.6 $10.7
-------------------------------
Non-U. S.
Others $ 1.2 $ 1.2 $ 1.0
- ----------------------------------------------------------
The Company also sponsors postemployment plans that, in certain
circumstances, provide salary continuation, disability related benefits,
severance pay and continuation of health care coverage during the period after
employment but before retirement.
Certain of the Company's benefit plans provide for enhanced benefits in the
event of a "change of control" as defined in the plans.
48
13. ACCRUED EXPENSES
December 31, 2004 2003
- ----------------------------------------------------------------
Employee benefits $ 30.1 $ 27.4
Other postretirement employee benefits 20.0 20.0
Salaries and wages 19.1 15.5
Taxes other than income taxes 7.2 14.4
Environmental 10.0 11.0
Interest 7.8 7.2
Other 83.9 75.0
- ----------------------------------------------------------------
Total $178.1 $170.5
- ----------------------------------------------------------------
14. COMMON STOCK
The Company is authorized to issue 150 million shares of common stock with
a par value of $.01 per share, of which 39,834,777 shares were outstanding at
December 31, 2004. A summary of changes in common stock issued and treasury
stock is presented below.
Common Stock Treasury Stock
-------------------------------------
Balance at December 31, 2001 48,132,640 8,511,532
Purchase of treasury stock - 1,225,282
Issuance pursuant to stock option plan - (293,647)
Award of performance stock and restricted stock (145,904)
Forfeitures and deferrals of stock awards - 35,408
-------------------------------------
Balance at December 31, 2002 48,132,640 9,332,671
Purchase of treasury stock - 838,200
Issuance pursuant to stock option plan - (1,079,792)
Award of performance stock and restricted stock - (80,731)
Forfeitures and deferrals of stock awards - 129,549
-------------------------------------
Balance at December 31, 2003 48,132,640 9,139,897
Purchase of treasury stock - 388,300
Issuance pursuant to stock option plan - (1,217,487)
Award of performance stock and restricted stock - (64,654)
Forfeitures and deferrals of stock awards - 51,807
-------------------------------------
Balance at December 31, 2004 48,132,640 8,297,863
- --------------------------------------------------------------------------- ------------------
In January 2004, the Board of Directors approved the initiation of a common
stock quarterly cash dividend program. During 2004, four quarterly cash
dividends of $0.10 per share were declared and paid totaling $15.7. No cash
dividends on common shares were declared or paid during 2003 or 2002.
On January 20, 2005, the Board of Directors declared a quarterly cash
dividend of $0.10 per common share, payable on February 25, 2005 to stockholders
of record as of February 10, 2005.
In March 2003, the Company announced an authorization to repurchase up to
an additional $100.0 of its outstanding common stock. The repurchases are made
from time to time on the open market or in private transactions and the shares
obtained under this authorization are anticipated to be utilized for stock
option plans, benefit plans and other corporate purposes. During 2004, the
Company repurchased 388,300 shares of its common stock at a cost of $13.1.
During 2003, the Company repurchased 838,200 shares of stock at a cost of $27.7
that completed its previous stock repurchase authorization and included $18.1
under its new authorization. In connection with the acquisition of Surface
Specialties, the Company suspended its stock buy-back program and does not
anticipate making future stock buy-backs for at least two years following
closing in order to maximize funds available for debt service and other
corporate purposes.
Stock Award and Incentive Plan: The 1993 Stock Award and Incentive Plan (the
"1993 Plan") provides for grants of a variety of awards, such as stock options
(including incentive stock options and nonqualified stock options), restricted
stock (including performance shares), and deferred stock awards and dividend
equivalents. In addition, automatic formula grants of restricted stock and
nonqualified stock options are awarded to non-employee directors. At December
31, 2004, the Company had reserved approximately 7,568,370 shares for issuance
under the 1993 Plan.
49
The Company has utilized the stock option component of the 1993 Plan to
provide for the granting of nonqualified stock options at 100% of the market
price on the date the option is granted. Options are generally exercisable in
cumulative installments of 33 1/3% per year commencing one year after the date
of grant and annually thereafter, with contract lives of generally 10 years from
the date of grant.
A summary of stock options activity is presented below.
2004 2003 2002
------------------------ ------------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- -----------------------------------------------------------------------------------------------------------------
Shares under option:
Outstanding at beginning of year 6,320,110 $28.31 6,692,689 $26.15 6,250,734 $25.73
Granted 545,070 37.14 873,600 27.06 951,100 24.48
Exercised (1,217,487) 20.20 (1,079,792) 13.44 (293,647) 10.59
Forfeited (303,259) 38.57 (166,387) 31.68 (215,498) 27.70
- -----------------------------------------------------------------------------------------------------------------
Outstanding at end of year 5,344,434 $30.47 6,320,110 $28.31 6,692,689 $26.15
- -----------------------------------------------------------------------------------------------------------------
Options exercisable at end of year 4,049,069 $30.40 4,687,172 $28.64 4,996,336 $25.67
- -----------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding and
exercisable at December 31, 2004:
Options Outstanding Options Exercisable
------------------------------------- -------------------
Weighted
Average Weighted
Remaining Average Weighted
Contractual Exercise Number Average
Range of Exercise Prices Outstanding Life (Years) Price Exercisable Price
- -------------------------------------------------------------------------------------------------
$ 2.77-10.00 1,859 3.19 $ 6.46 1,859 $ 6.46
11.66-24.44 1,795,633 5.17 22.45 1,564,483 22.23
25.08-37.75 2,453,351 6.48 30.70 1,405,603 29.72
38.00-47.34 684,091 2.35 40.23 668,424 40.22
47.81-55.00 409,500 3.08 48.09 408,700 48.09
- -------------------------------------------------------------------------------------------------
$ 2.77-55.00 5,344,434 5.25 $30.47 4,049,069 $30.40
- -------------------------------------------------------------------------------------------------
As provided under the 1993 Plan, the Company has also issued restricted
stock and performance stock. Restricted shares are subject to certain
restrictions on ownership and transferability that lapse upon vesting.
Performance share payouts are based on the attainment of certain financial
performance objectives and may vary depending on the degree to which the
performance objectives are met. Performance shares awarded in 2002, 2003 and
2004 relate to the 2004, 2005 and 2006 performance periods, respectively. The
total amount of stock-based compensation expense (income) recognized for
restricted stock and performance stock was $4.6 in 2004, $2.0 in 2003 and $(1.3)
in 2002. A summary of restricted stock and performance stock activity is as
follows:
- ----------------------------------------------------------------------------------------------------
2004 2003 2002
- ----------------------------------------------------------------------------------------------------
Outstanding awards - beginning of year 230,580 297,655 265,323
New awards granted 65,204 80,731 145,904
Shares with restrictions lapsed(1) (15,159) (13,739) (34,226)
Restricted shares forfeited (70,224) (134,067) (79,346)
- ----------------------------------------------------------------------------------------------------
Outstanding awards - end of year 210,401 230,580 297,655
- ----------------------------------------------------------------------------------------------------
Weighted average market value of new awards on award date $36.84 $26.93 $24.67
- ----------------------------------------------------------------------------------------------------
(1) Shares with restrictions that lapsed in each period above include shares
deferred by certain participants. The Company issued these participants
equivalent deferred stock awards that will be distributed in the form of
shares of common stock, generally following termination of employment.
The compensation costs that have been charged against income for restricted
stock and performance stock awards have been noted above. The effects of
applying the fair value method provided under SFAS No. 123 are shown in Note 1
and are not necessarily indicative of future amounts.
50
In the event of a "change of control" (as defined in the 1993 Plan), (i)
any award under the 1993 Plan carrying a right to exercise that was not
previously exercisable and vested will become fully exercisable and vested, (ii)
the restrictions, deferral limitations, payment conditions and forfeiture
applicable to any other award granted under the 1993 Plan will lapse and such
awards will be deemed fully vested and (iii) any performance conditions imposed
with respect to awards shall be deemed to be fully achieved.
15. PREFERRED STOCK
The Company is authorized to issue 20 million shares of preferred stock
with a par value of $.01 per share in one or more classes or series with rights
and privileges as adopted by the Board of Directors. At December 31, 2004, there
were no shares of preferred stock outstanding.
As of December 17, 1993, the Company had issued to Cyanamid, a subsidiary
of Wyeth, eight million shares of preferred stock in conjunction with Cytec's
spin-off from Cyanamid. At December 31, 2003 and through September, 2004, only
4,000 shares of Series C Cumulative Preferred Stock (the "Series C Stock")
remained outstanding. The Series C Stock, which had a redemption value of $25
per share, was redeemed on September 30, 2004 for $10.0 in cash. A charge to net
earnings available to common stockholders of $9.9 was recorded as a premium paid
to redeem preferred stock. The $10.0 payment was not tax deductible. The Company
also settled a series of disputed matters with Wyeth at a cost of $2.0 which is
recorded in other income (expense), net. The Series C shares were subsequently
retired.
The Series C Stock had a liquidation and redemption value of $0.1 and had
an annual dividend of $1.83 per share (7.32%). Under the terms of the Series C
Stock, the Company was subject to debt restrictions and restrictions on certain
payments which included payments of cash dividends on common stock, payments for
the repurchase of common stock outstanding and payments on certain classes of
debt.
16. OPERATIONS BY SEGMENT AND GEOGRAPHIC AREAS
Segments: Effective January 1, 2005, the Company realigned the organizational
structure of its four reportable segments. In accordance with SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," the
following disclosures report certain information under the new reporting
structure for all periods presented.
The Company has four reportable segments: Cytec Performance Specialties,
Cytec Surface Specialties, Cytec Engineered Materials and Building Block
Chemicals.
The Cytec Performance Specialties segment produces water treatment, mining,
phosphine chemicals and polymer and specialty additives that are used mainly in
water and wastewater treatment, mineral separation processing, semiconductor
manufacturing and plastics applications. The Cytec Surface Specialties segment,
which will include the newly acquired Surface Specialties business after the
aforementioned acquisition, produces performance and coating chemicals and that
are used primarily in industrial coatings, adhesives and sealants applications.
The Cytec Engineered Materials segment manufactures and sells materials that are
used mainly in commercial and military aviation and launch vehicles, satellites
and aircraft brakes. The Building Block Chemicals segment manufactures
acrylonitrile, acrylamide, hydrocyanic acid, melamine and sulfuric acid. Some of
these chemical intermediates are used in the manufacture of the Company's
specialty chemicals, with the remainder sold to third parties.
The accounting policies of the reportable segments are the same as those
described in Note 1. All intersegment sales prices are cost based. The Company
evaluates the performance of its operating segments based on earnings from
operations and cash flows of the respective segment.
51
Summarized segment information is as follows:
Cytec Cytec Cytec Building
Performance Surface Engineered Block Total
Specialties Specialties Materials Chemicals Segments
- -------------------------------------------------------------------------------------------------------------
2004
Net sales to external customers $670.3 $303.4 $487.0 $260.6 $1,721.3
Intersegment net sales 5.0 -- -- 85.0 90.0
- -------------------------------------------------------------------------------------------------------------
Total net sales 675.3 303.4 487.0 345.6 1,811.3
Earnings from operations 50.4 35.8 83.4 15.6 185.2
Percentage of sales 7.5% 11.8% 17.1% 4.5% 10.2%
Total assets 614.3 263.5 515.4 189.7 1,582.9
Capital expenditures 37.1 15.7 19.1 12.2 84.1
Depreciation and amortization 36.6 14.6 10.7 25.5 87.4
- -------------------------------------------------------------------------------------------------------------
2003
Net sales to external customers $584.9 $267.1 $408.7 $211.1 $1,471.8
Intersegment net sales -- -- -- 65.7 65.7
- -------------------------------------------------------------------------------------------------------------
Total net sales 584.9 267.1 408.7 276.8 1,537.5
Earnings from operations 34.1 26.6 66.0 20.7 147.4
Percentage of sales 5.8% 9.9% 16.2% 7.5% 9.6%
Total assets 577.1 250.4 478.9 197.5 1,503.9
Capital expenditures 45.5 14.2 18.3 10.0 88.0
Depreciation and amortization 33.7 15.9 11.5 27.3 88.4
- -------------------------------------------------------------------------------------------------------------
2002
Net sales to external customers $536.0 $247.5 $395.5 $167.2 $1,346.2
Intersegment net sales - - - 53.1 53.1
- -------------------------------------------------------------------------------------------------------------
Total net sales 536.0 247.5 395.5 220.3 1,399.3
Earnings from operations 42.7 22.1 65.8 5.4 136.0
Percentage of sales 8.0% 8.9% 16.6% 2.4% 9.7%
Total assets 433.3 205.1 477.8 204.4 1,320.6
Capital expenditures 20.2 5.3 13.4 7.9 46.8
Depreciation and amortization 30.0 15.6 10.7 26.8 83.1
- -------------------------------------------------------------------------------------------------------------
The following table provides a reconciliation of selected segment
information to corresponding amounts contained in the Company's Consolidated
Financial Statements:
- ------------------------------------------------------------------------------------------------
2004 2003 2002
- ------------------------------------------------------------------------------------------------
Net sales:
Net sales from segments $ 1,811.3 $ 1,537.5 $ 1,399.3
Elimination of intersegment revenue (90.0) (65.7) (53.1)
- ------------------------------------------------------------------------------------------------
Total consolidated net sales $ 1,721.3 $ 1,471.8 $ 1,346.2
- ------------------------------------------------------------------------------------------------
Earnings from operations:
Earnings from segments $ 185.2 $ 147.4 $ 136.0
Corporate unallocated (1) (2) (17.5) (3.3) (17.6)
- ------------------------------------------------------------------------------------------------
Total consolidated earnings from operations $ 167.7 $ 144.1 $ 118.4
- ------------------------------------------------------------------------------------------------
Total assets:
Assets from segments $ 1,582.9 $ 1,503.9
Other assets (3) 668.7 542.5
- -----------------------------------------------------------------------------
Total consolidated assets $ 2,251.6 $ 2,046.4
- -----------------------------------------------------------------------------
(1) Includes $8.0 in 2004 relating to the settlement of a class action law suit
on behalf of purchasers of carbon fiber and other related matters (Refer to
Note 10).
(2) Earnings from operations in 2002 include restructuring charges of $13.7
(Refer to Note 3).
(3) Includes cash and cash equivalents at December 31, 2004 and 2003, of $323.8
and $251.1, respectively.
52
Operations by Geographic Areas: Net sales to unaffiliated customers presented
below are based upon the sales destination, which is consistent with
management's view of the business. U. S. exports included in net sales are based
upon the sales destination and represent direct sales of U. S.-based entities to
unaffiliated customers outside of the United States. Earnings from operations
are also based upon destination and consist of total net sales less operating
expenses. Identifiable assets are those assets used in the Company's operations
in each geographic area. Unallocated assets are primarily cash and cash
equivalents, deferred taxes, miscellaneous receivables, construction in progress
and the fair values of derivatives. Except for the United States, no country
accounted for more than 10% of consolidated net sales.
- ---------------------------------------------------------------------------------------------
2004 2003 2002
- ---------------------------------------------------------------------------------------------
Net sales
United States $ 802.4 $ 719.7 $ 685.8
Other Americas 188.0 151.6 139.5
Asia/Pacific 261.9 211.1 197.3
Europe/Middle East/Africa 469.0 389.4 323.6
- ---------------------------------------------------------------------------------------------
Total $ 1,721.3 $ 1,471.8 $ 1,346.2
- ---------------------------------------------------------------------------------------------
U. S. exports included in net sales above
Other Americas $ 70.7 $ 47.8 $ 40.3
Asia/Pacific 102.7 85.2 86.1
Europe/Middle East/Africa 61.0 53.6 38.3
- ---------------------------------------------------------------------------------------------
Total $ 234.4 $ 186.6 $ 164.7
- ---------------------------------------------------------------------------------------------
Earnings from operations (1) (2)
United States $ 69.7 $ 58.3 $ 36.0
Other Americas 31.2 27.3 24.9
Asia/Pacific 30.3 22.0 28.2
Europe/Middle East/Africa 36.5 36.5 29.3
- ---------------------------------------------------------------------------------------------
Total $ 167.7 $ 144.1 $ 118.4
- ---------------------------------------------------------------------------------------------
Identifiable assets
United States $ 1,001.9 $ 953.8
Other Americas 148.1 138.9
Asia/Pacific 82.7 76.6
Europe/Middle East/Africa 306.5 259.1
- ---------------------------------------------------------------------------------
Total 1,539.2 1,428.4
Equity in net assets of and advances to associated
companies 85.5 82.1
Unallocated assets 626.9 535.9
- ---------------------------------------------------------------------------------
Total assets $ 2,251.6 $ 2,046.4
- ---------------------------------------------------------------------------------
(1) Includes $8.0 in 2004 relating to the settlement of a class action lawsuit
in the U.S. on behalf of purchasers of carbon fiber and other related
matters (Refer to Note 10).
(2) Earnings from operations in 2002 include restructuring charges of $13.6 and
$0.1 in the U.S. and Europe/Middle East/Africa, respectively (Refer to Note
3).
53
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Cytec Industries Inc.:
We have audited the accompanying consolidated balance sheets of Cytec Industries
Inc. and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three-year period ended December 31, 2004. In connection
with our audits of the consolidated financial statements, we also have audited
the consolidated financial statement schedule, "Schedule II - Valuation and
Qualifying accounts." These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cytec Industries
Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
As discussed in Note 1P to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations," effective January 1, 2003. Also
as discussed in Note 1F to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," effective January 1, 2002.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Cytec
Industries Inc. and subsidiaries internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated February 17, 2005 expressed an
unqualified opinion on management's assessment of, and the effective operation
of, internal control over financial reporting.
/s/KPMG LLP
- -----------------------
Short Hills, New Jersey
February 17, 2005, except as to Notes 1B, 1N,
1P, 6, 8, 11 and 16, which are as of June 13, 2005
54
QUARTERLY DATA (UNAUDITED)
Note: Quarterly results were restated to show the retroactive application of the
change from the LIFO to the FIFO inventory costing method which was adopted on
January 1, 2005. Previously reported amounts were restated for all periods
presented.
(Dollars in millions, except per share amounts) 1Q 2Q 3Q 4Q Year
- -------------------------------------------------------------------------------------------------------------------
2004
Net Sales $415.2 $422.0 $433.5 $450.6 $1,721.3
Gross profit (1) 105.1 110.4 101.1 101.6 418.2
Net earnings available to common
stockholders (2) 33.2 31.2 10.5 46.2 121.1
Basic net earnings available to common
stockholders per share (3) $ 0.85 $0.80 $0.27 $1.17 $3.06
Diluted net earnings available to common
stockholders per share (3) $0.83 $0.77 $0.26 $1.13 $2.96
2003
Net Sales $367.4 $374.9 $367.7 $361.8 $1,471.8
Gross profit (1) 95.8 96.5 83.7 83.9 359.9
Net earnings 15.7 25.8 22.4 15.2 79.2
Basic net earnings per common share:
Earning before accounting changes $0.76 $0.66 $0.57 $0.39 $2.38
Accounting Change (0.35) -- -- -- (0.35)
- ---------------------------------------------------------------------------------------------------------------------
Basic net earnings per common share (3) $0.41 $0.66 $0.57 $0.39 $2.03
Diluted net earnings per common share:
Earnings before accounting change $0.74 $0.65 $0.55 $0.38 $2.31
Accounting change (0.34) -- -- -- (0.34)
- ---------------------------------------------------------------------------------------------------------------------
Diluted net earnings per common share (3) $0.40 $0 .65 $0 .55 $0.38 $1.97
(1) Gross profit is derived by subtracting manufacturing cost of sales from net
sales.
(2) First and second quarter results were restated to show the effect of FSP
106-2 which was adopted during the third quarter of 2004.
(3) The sum of the quarters may not equal the full year basic and diluted
earnings per share since each period is calculated separately.
55
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2004, 2003 And 2002
(In Millions)
Additions or
(deductions)
charged or
Balance (credited) Other additions Balance
Description 12/31/2003 to expenses or (deductions) 12/31/2004
- ----------- ---------- --------------- ---------------- -----------
Reserves deducted from
related assets:
Doubtful accounts
receivable $ 7.6 $ 0.4 $ (l.3) 1 $ 6.7
Environmental accruals $ 79.6 $ (0.1) $ (8.8) 2 $ 70.7
Deferred tax asset
valuation allowance $ 4.6 - $ 7.6 3 $ 12.2
- -----------------------------------------------------------------------------------------
1 Principally bad debts written off, less recoveries.
- -----------------------------------------------------------------------------------------
2 Environmental remediation spending, net of $0.6 currency exchange.
- -----------------------------------------------------------------------------------------
3 Primarily attributable to U. S. state income tax net operating loss and credit
carryforwards.
Additions or
(deductions)
charged or
Balance (credited) Other additions Balance
Description 12/31/2002 to expenses or (deductions) 12/31/2003
- ----------- ---------- --------------- ---------------- ----------
Reserves deducted from
related assets:
Doubtful accounts
receivable $ 8.8 $ 0.2 $ (l.4) 1 $ 7.6
Total investments,
advances and other
assets $ 17.0 - $ (17.0) 2 $ -
Environmental accruals $ 83.7 $ 1.8 $ (5.9) 3 $ 79.6
Deferred tax asset
valuation allowance - - $ 4.6 4 $ 4.6
- -----------------------------------------------------------------------------------------
1 Principally bad debts written off, less recoveries.
- -----------------------------------------------------------------------------------------
2 Liquidation of associated company and write-off of preferred stock of company
in bankruptcy both of which were fully reserved.
- -----------------------------------------------------------------------------------------
3 Environmental remediation spending of $9.3, net of $1.7 currency exchange and
$1.7 for the gross up of a certain liability and related receivable.
- -----------------------------------------------------------------------------------------
4 Attributable to U. S. state income tax net operating loss carryforwards.
Additions or
(deductions)
charged or
Balance (credited) Other additions Balance
Description 12/31/2001 to expenses or (deductions) 12/31/2002
- ----------- ---------- --------------- ---------------- -----------
Reserves deducted from
related assets:
Doubtful accounts
receivable $ 7.8 $ 2.2 $ ( 1.2) 1 $ 8.8
Total investments,
advances and other
assets $ 15.4 $ 1.7 2 $ (0.1) $ 17.0
Environmental accruals $ 93.9 - $ (10.2) 3 $ 83.7
- -----------------------------------------------------------------------------------------
1 Principally bad debts written off, less recoveries.
- -----------------------------------------------------------------------------------------
2 Write-off of unconsolidated associated company.
- -----------------------------------------------------------------------------------------
3 Environmental remediation spending, excluding external efforts.
56